The last couple of weeks have been a tumultuous time for STOs. The massive increase in the crypto market over the last year has catapulted blockchain tokens into the mainstream. However, as money flows into cryptocurrencies, the attention of regulators is drawn more and more to the space.
Blockchains like Bitcoin and Ethereum are somewhat insulated from the effects of regulations because, as decentralized blockchains not tied to the value of one company, they are not treated as securities by regulators. Securities are governed by much stricter regulation across the world and this makes regulations a much bigger issue for STOs. The effects of these regulations tightening has been seen across the crypto sphere over the last month.
On July 16th Hong Kong’s market regulatory body, the Securities and Futures Commission (SFC), issued an official statement declaring that Binance is not licensed to sell stock tokens in its jurisdiction. Binance had been issuing synthetic stocks tokens tied to the value of Apple (AAPL), Coinbase (COIN), Microsoft (MSFT), Microstrategy (MSTR) and Tesla (TESLA). These stocks had a trading volume of roughly $1,000,000 and were seen by the SFC as a violation of Hong Kong’s security laws.
Regulators across the globe have issued similar warnings to Binance. Huge markets worldwide such as Italy, Germany, Poland, Japan, Thailand, the Cayman Islands and the US follow the first warning that was issued by the UK’s financial conduct authority. The warnings have led to Binance withdrawing stock tokens from its platform.
However, Binance is not the only exchange to have recently removed stock tokens. On July 25th, UniSwap also removed STOs from its front-end interface. Synthetic tokens that represented companies such as Amazon, Coinbase and Alphabet had previously been listed on the exchange. The removal of these tokens follows speculation that UniSwap Labs, the company behind UniSwap, had been contacted by the Securities and Exchange Commission (SEC).
Another theatre where the presence of regulations is being felt is in stablecoins. Many stablecoins are backed by a company that holds assets in a bank and issues tokens using these assets as collateral. In other words, a single centralised company is distributing tokens based on its own holdings. This method of issuing stablecoins has recently been determined to constitute a security token, meaning that stablecoins such as these are bound by the same regulations as securities. This has led to UniSwap also removing a number of currencies such as sEUR, a synthetic Euro pegged stablecoin, from its exchange.
The withdrawal of security tokens from both the largest centralized crypto exchange and the largest decentralized crypto exchange points to one thing. STOs will not be able to operate in a way that violates regulations. There is too much attention on crypto and, unlike other blockchains, STOs are easy to define as securities. This makes it impossible for them to operate in any sort of regulatory grey area.
The Next Step For Crypto
However, security tokens constitute a genuinely revolutionary use case for blockchain. The ability for companies to issue shares without the mass of expense needed to list on a centralised exchange means that STOs can make taking a company public a prospect accessible to even smaller companies. The lack of availability of STOs on Binance and UniSwap means that there is currently very little liquidity in the market.
STOs are set to become a vital part of the crypto sphere and they’re here to stay. This means that there is an opportunity, some would say a necessity, to create a solution that can both provide liquidity to the STO market whilst simultaneously operating within the confines of security regulations.
IX Swap is one such solution. By utilising an automated market maker (AMM), IX Swap allows users to add security tokens to liquidity pools, providing traders with the opportunity to immediately swap other crypto assets for STOs. This model has been remarkably successful in providing liquidity to DeFi markets leading to the incredible explosion in the DeFi industry over the last year.
Although IX Swap hopes to see similar success for this model in the STO market, IX Swap has one vital difference to the AMMs in DeFi. IX Swap introduces a third party licenced custodian for security tokens. When a liquidity provider inputs a security token into a liquidity pool, a smart contract will redirect that token to the custodian. The custodian will then validate the authenticity and create a share register for the token.
Dealing and trading STOs require licensed brokers and custodians in order to comply with the strict regulations surrounding securities. This method integrates this custodian into the AMM model allowing IX Swap to do for the STO market what UniSwap did for DeFi whilst simultaneously abiding by regulations.
The recent changes in Binance and UniSwap’s STO offerings are a key part of the evolution of STOs. It has been clear for a while that STOs would not be able to operate with the same regulatory impunity as other cryptocurrencies. The moves by Binance and UniSwap have only underlined what was already quite apparent; that a new model was needed in order for STOs to make the next step towards general adoption. IX Swap is excited to be part of that next step.