Security Tokens Rest On A Knife Edge, Says Le Merle

A handful of projects could decide the future of security tokenization, according to a leading figure at a security issuer. Matthew Le Merle of Securitize says that the first STO’s could become paragons of asset tokenization – or they could set the industry back by a decade.

Le Merle told Crypto Briefing that the entire industry “rest[s] on a knife edge.”

On one hand, he said, the world is gradually recognizing the benefits of asset tokenization, which could allow trillions of dollars of value to be easily traded.

On the other, Le Merle noted signs that the bad practices of the 2017 ICO boom could be returning, leading to a proliferation of scams and dangerous projects.

Le Merle’s main concern is that many of the people who promoted ICOs in 2017 are now pivoting towards STOs. “STO salesmen are encouraging people to make investments that they don’t necessarily understand,” Le Merle said.

There have already been complaints about “scammy STO adverts” promoting tokenized equities to retail investors in the US. Such offerings are illegal unless they have the appropriate exemption.

These fears are echoed by Stephen McKeon, a University of Oregon professor and an expert in security issuances, who says that low-quality assets are the “main danger” facing the industry.

So far, McKeon says, “security tokens have been of high quality.” Most issuers he has been in contact with have been appropriately diligent, and they represent the majority of the North American STO market, he added. Sales that put investors at real risk have been few and far between.

Like any other start-up sector, blockchain projects have a high failure rate, which Le Merle estimates to be between 80 and 90 percent. While that does not necessarily make ICO and STO participation bad, it does make them risky.

Retail investors are particularly vulnerable, Le Merle says, noting that people from traditional finance and VC backgrounds have clear metrics for gauging risk.  But these techniques are not currently available to the rest of the population.

Many promoters marketed ICOs as safe investments, thereby misleading the public. If promoters in the nascent STO market do not improve their behavior, Le Merle says, they could invite an influx of naive money into low-quality, high-risk offerings.

That would obligate the U.S. SEC and other regulators to step in and “tighten the screws.” If regulation becomes too restrictive, it could set the sector back by as much as ten years, according to Le Merle.

“We need to filter out the bad guys and the incompetent people,” he added. He suggests some sort of licensing or recognized accreditation for issuers, as well as punitive measures for actors caught misleading investors.

But that may not be necessary. Security tokens have not exploded in the same way that ICOs did. Although many experts predicted a billion-dollar STO market, McKeon says that security issuances have not been as numerous or distributed as anticipated.

That’s not necessarily a bad thing; asset tokenization is still in the experimentation phase, McKeon says. Although the wider industry doesn’t see it, there’s a lot of work happening behind the scenes.

The Societe Generale’s $112M bond issuance last month is proof that institutions, the real drivers behind asset tokenization, are actively interested in the technology and slowly coming to grips with it. According to Le Merle, the sector is unlikely to see anything more than “plain-vanilla issuances” for the foreseeable future. As mainstream finance becomes comfortable participating and issuing security tokens, more aspirational sales will start to appear.

Instead of resting on a knife edge, the industry might still be being spoon-fed.

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