by Trent Rhode
In part 1 and part 2 of this series, we explored why ICOs are failing in advancing principles of decentralization, fairness and equal opportunity in international investment and finance, and how Security Token Offerings (STOs) – aka decentralized digital securities – may hold promise for inspiring such an evolution.
Although STOs hold a lot of potential, if they are to herald a new way of organizing the world’s financial resources, they still have a long way to go, and many challenges to overcome. One of the biggest dangers is that large investors will dominate and suppress decentralized finance, blocking attempts at meaningful crowd funding networks.
Another danger is that the market will be flooded with larger, more experienced investors who tend to take advantage of smaller investors. For example, it may be that the emerging trend seen in ICOs continues, where large investors get deals in private sales, only for them to then dump tokens as soon as they are listed, making an immediate profit while driving down the price for smaller, less experienced retail investors who paid more and are looking for a return. A potential solution: It is not uncommon in traditional investment offerings, as well as in some ICOs, that there is a “lock-in” period where investors are prevented from selling their assets for some length of time ranging from months to years after issuance. If this were to become more commonplace with blockchain-based fundraising, perhaps spreading out the time that assets are able to be sold, the issue of investors immediately dumping their tokens and driving the price down would hopefully be mitigated. Indeed, many regulated securities offerings actually require this lock-in period. Further, since security tokens have the potential to automate crowd funding/investing, any level of investor should be able to participate in presales and early-stage funding. This would allow smaller investors to make potentially higher returns, instead of only large investors getting the best deals in private “pre-sales” which sometimes sell out completely. This would not only give smaller investors an opportunity to improve their financial situations, but would also help to ensure technologies and companies are invested in beyond just those that are beneficial to or highly regarded by the wealthy. A final danger is that large investors, also known as “whales” will continue manipulating markets, buying up large amounts of cryptocurrencies or dumping them on the market to manipulate prices for their own benefit, for example.
Other manipulation includes “spoofing” (placing large buy or sell orders and cancelling before they are filled), and wash trading (buying and selling a currency to create fake volume, making the currency more appealing to investors). Since these practices are illegal in established securities markets, hopefully, with more regulation and further maturation of the blockchain-based investment market, these practices will not be so common.
Indeed, it is clear that the cryptocurrency market must mature and offer more ethical and regulatory compliant options for investors in order for blockchain-based investments to become more widespread. Although many early adopters of blockchain technology may hold ideals of deregulation, it is clear that lack of regulations has not and will not lead to more fair markets. Instead of fighting regulations, we must push for fair regulations for STOs, transparency and oversight of exchanges, and further decentralization of blockchain networks themselves, since the underlying technology has become increasingly centralized. In part 4 of this series, we’ll take a look at the existing STO scene, including what exchanges, issuance platforms, and actual security tokens currently exist or are launching in the near future.
Author BioTrent is a professional writer and editor with over 10 years of experience writing on various topics. With a background and education in Journalism, and a passion for decentralization of global power structures, his writing has recently focused on making blockchain and cryptocurrency related topics easy to understand at Unhashed.com, but he also enjoys writing about ecology, agriculture, sustainability, health and wellness, homesteading, business, economics and finance.