Trustless payment methods were the first disruption blockchain brought to the financial industry. The second wave of disruption came about when the ICO boomed in 2017 as a way to reach a larger market of investors through crowdfunding smart contracts on Ethereum. In 2017 alone, ICOs raised around $7 billion.

More recently, we’re seeing the IEO (Initial Exchange Offering) — a very similar construct but with the token offering done by the exchange instead of the project itself. We’re finally starting to see the rise of the STO (Security Token Offering), as a way to conduct a compliant blockchain-based capital raise.

However, the industry is clearly fragmented and nascent. The crypto industry prefers ICOs and IEOs, which still dominate in terms of the amounts raised. Crypto investors are putting their money where their mouth is — utility tokens. 

On the side of traditional securities, it’s even far more lopsided, as tokenization has yet to make a dent in the global securities market, with under one billion dollars of tokenized securities, and hundreds of trillions of dollars of securities. Market penetration is so far orders of magnitude under 1%.

Instead of a productive tension between the crypto and securities markets forging a collaborative movement towards Security Tokens, the trend is more like a few players in each market taking the leap, with not many following suit.

One glaring issue is on a technical level. Most of the supposed STOs out there are using ERC-20 tokens. ERC-20 tokens don’t have built-in transfer restrictions, meaning you can send an ERC-20 token to anyone, such as a minor, an ex-convict, an unaccredited investor, or any other number of entities where it wouldn’t be compliant. This means that little 5-year-old Ji-woo in North Korea can own a tokenized share of Tesla, automatically violating accredited investor and KYC/AML laws.

A practical issue, though one that will inevitably be solved with time, is the complete lack of liquidity. While increased liquidity is one of the many touted benefits of Security Tokens, the reality is that there’s currently no lively secondary market for Security Tokens whatsoever. It’s virtually a buy-and-hold market.

Finally, there’s the issue with the regulatory uncertainty. People largely don’t know whether they should treat Security Tokens as crypto (especially considering that most are ERC-20 tokens, the same as most ICO tokens), as securities, or as a class of their own. The safest bet of course is to treat them as securities, but this means projects have to comply with the same — often stringent and complex — regulations that have been around for centuries, which the industry largely has an aversion to.

Ultimately, the industry needs collaboration instead of competition, which can be brought about by industry organizations, the largest of which being the Security Token Alliance. There’s a long road ahead until mass adoption, but that also means a lot of opportunity along the way.