The cryptocurrency market, long plagued by controversy, has been plunging for a year. LongHash analysis found that 30 of the top 50 cryptocurrencies fell by more than 90% in 2018. Currently, the market is still generally bearish. As the ICO craze cools down and ETH prices plummet, some are beginning to worry that the blockchain and cryptocurrency industry may be dying.
Given this environment, it's easy to see why people are scrambling to find possible breakthroughs. This also explains why many people are excited about security token offerings, or STOs. Security tokens are cryptocurrencies that are pegged to real-world securities (such as equity) and are therefore more stringent than most ICO tokens. Security tokens have become so hot that some investors are calling them the next crypto bubble.
Many people believe that STO will save the blockchain industry. They won't. STO is actually like using the Internet to send faxes, neither fish nor fowl.
To be more precise, STO is just another WinFax. In the early days of the development of the Internet, there was a software called WinFax that could simulate faxing on Windows systems through software. At the time, computers were connected to the Internet via modems, and many traditional office workers had not yet understood what the Internet was or how to use email. They are most familiar with fax machines, so they are more comfortable using fax than email. For this reason, WinFax emerged. This may sound ridiculous, but some people at the time actually viewed the Internet as just another fax system. In 1998, Paul Krugman, who later won the Nobel Prize in Economics, said: "By around 2005, the Internet will have no more impact on the economy than the fax machine."
Similarly, on the surface, STOs appear to be just another way to issue tokens. However, STO is very different from ICO. The most significant feature of STO is that the tokens issued have security properties and are regulated by securities agencies (such as the U.S. Securities and Exchange Commission), so they must comply with relevant securities laws and regulations.
While security tokens are distributed on a blockchain, which is supposed to be a fully decentralized platform, they still must meet know-your-customer (KYC) requirements and regulations must be adhered to when trading.
STO may look good. For blockchain projects and investors, the threshold is much lower than an IPO, but much higher than an ICO, since almost anyone can create ICO tokens and sell them to the public. STO sounds good, right?
Not exactly. STO destroys the essence of blockchain technology – decentralization. From token issuance to regulation, every step of the STO process must be completed in a centralized manner.
When a decentralized system has an influential central node, STO is just talk. It is also difficult to understand why we would want to use a blockchain platform to simulate existing securities issuance platforms. After all, we already have a well-proven functional securities platform like Nasdaq and the New York Stock Exchange. Why do we need a less efficient imitation?
To some extent, we can think of STOs as a large-scale recruitment campaign for compliant blockchain projects, but in the end, this campaign may still end in failure. After all, a fax is not an email, and assets on the blockchain are not securities. Any decentralized system that attempts to centralize governance and operations will find itself with inconsistencies. The decentralized nature of blockchain makes it a unique and powerful technology. Without that functionality, a blockchain is nothing more than an inefficient database.
Today, many young people do not know what a fax is, and they have never seen a fax machine. It is now clear to everyone that the Internet is not a simple extension of fax technology, and email is not the same as fax. In terms of efficiency and functionality, the Internet has gone far beyond the concept of fax.
However, we have to admit that at that time, WinFax did meet the needs of many people. By helping people use the Internet in a way that made them comfortable, WinFax may have prompted more companies to buy computers and try using the Internet. We might even say this propelled the internet towards mainstream usage.
Likewise, we need regulation for wider crypto adoption, but STOs are not the answer. Blockchain technology is new and has its own unique characteristics and development path, and should therefore be regulated in an innovative manner accordingly.
Just as we wouldn’t transplant the regulations we use to regulate newspapers or magazines to regulate the Internet, we shouldn’t force blockchain assets to comply with securities laws. We cannot regulate new technologies by forcing them to conform to old regulatory frameworks. Suppressing the decentralization of blockchain will only be counterproductive.
