Devin Huang: Two Structural Trends of STO to Gain Liquidity in 2019

(Devin Huang: The Founder of The Cabin Capital ,THE CABIN CAPITAL is registered in Singapore,The founding team has participated in the global crypto currency market since 2013. They focus on blockchain-based capital. Market investment, through the industry community and influence co-construction plan, to promote the realization of the global blockchain technology.)

Subjectively, I have always been willing to define “STO” as the digital security industry, partly because of the regulatory stance on STO at home. As far as the development of global industrial structure and “STO” inn head countries are concerned, to define it as “digital security” is based on some legal and industrial conventions, and is more appropriate. Maybe some industry watchers have found out that STO (Security Token Offering) and DSO (Digital Security Offering) have existed concurrently since 2019, though they sometimes appear in different contexts. This is a very interesting phenomenon.

In Cabin Capital’s understanding, no matter STO or DSO, they are only a part of the digital security industry, and could not represent the entire industry by themselves. There are profound historical causes for the formation of digital security industry, the biggest of which is the extremely outstanding global property of blockchain. Hence, strictly speaking, STO itself has inherited the strong financial properties of blockchain, especially in assets management and issuance. To consider STO as the pronoun of OLD MONEY is not completely right, and at least has its limitations.

At present, the general pattern of the digital security industry has just taken shape from the chaos. In the opinion of Cabin Capital, it is mainly made up by three plates. The internal pattern consists of the securitization of token and the tokenization of security. The external entrance is the STO or DSO which arouses heated discussions. At the same time, an industrial division system is formed by following the existing judiciary and regulatory orientations. The system, though being in its infancy, is developing at a rate to my relief, supported by the huge reserve of traditional assets and the global properties of blockchain. Though it is small, it is comprehensive.

I am always asked about the future development of STO. We talk about the future because of the problems we have at the present. STO has two major problems in its current stage of development. Certainly, the major premise is that these problems exist in the STO business system established based on American laws.

The first is the systematic problem, that is, a lack of liquidity. The primary market dares not to make investment, while the secondary market does not have sufficient products to output. The second is the structural problem. On the whole, the industry form of STO is limited by the regulatory form of the country it is in. The regulatory pattern varies with country, and is separate from each other. The industry itself should satisfy the necessity of industrial division and operational coordination worldwide. In the actual development, industry builders will suffer from a too high operating cost due to the imbalance in business development, while the idle operation will leave room for the problem that the bad money drives out the good money.

Besides, affected by the systematic problem, the core industry builders, the head echelon, are not capable enough in business output. As regards the internal software and hardware facilities, people are also swayed on how to strike a balance between business progress and compliance risk. There is still a lot of work to do in the standardization of business and the establishment of management mechanism. What’s more, the construction of liquidity infrastructure for ST (Security Token) is not done very well. Besides the secondary market, the asset management tools and circulation tools are also rarely seen.

As the early industry builders, we have a deep feeling about the above problems. Hence, we feel quite necessary to initiate STOCOOP, an industrial organization established based on the global business collaboration mechanism. I don’t mind devoting more efforts in the early stage. Whether it is just a feeling or an act in pursuit of benefits, we need to do something. Only those who are in this industry are likely to get on with it, and show concern about its future.

Leave these top-level problems to the development and the time. That is destiny, and a trend, which cannot be changed by manpower and man’s will in a short time, for the reason that a large part of the chain will be involved.

On an industrial hemp forum yesterday, I was asked by the media about how to solve the problem of liquidity. I cannot give an answer to the top-level problem, for the key is left to the “development and time”. For the underlying problems especially some about the ways and means, I gave a brief answer. As far as I can see, there is a great paradox in the portal of the STO industry. The inevitability and necessity of STO globalization are not sufficiently compatible with the existing regulatory pattern. Under the background that there is a lack of liquidity, the core construction of industry in the early period presents a situation of mixed operation, after the functional extension. tZero is such an example. Since November 2018, more core industry builders have tried to break down the barriers between different business on the industrial division chain, thus to gain an edge in business structure and to gain stocks of liquidity. However, such efforts are still confined to the existing business framework, and fail to make extensional breakthroughs. From 2019, the mixed operation on a single platform begins to evolve to the cross-platform cooperation.

Since March 2019, two trends have developed in STO, the portal of the digital security industry, in the acquisition of liquidity, that is, the exploration of compatibility solutions under different compliance frameworks, which is mainly done in the asset management for ST and the public offering of ST. Such exploration or attempt enables the early industry builders to try integrating some business with financial property such as IEO and ICO in the current blockchain field, and make compliance-related compatibility design, thus to help some asset issuers obtain a small part of liquidity. Certainly, this should be done as compliantly as possible, which is the supreme guideline for the prudent. It is also possible that some practitioners in this industry pay more attention to their own interest, and fail to be prudent.

The IEO or ICO-combining compliance compatibility design is an extensional attempt. Though it is of some feasibility in legal operation, it does not apply to all asset issuers, and should be weighed carefully. Choices should be made by focusing on the long-term benefit of the asset issuer. Based on this purpose, to open the secondary market trading of the Reg S-governed ST on the existing digital currency transaction platform is also a business direction to be explored. As early as in the late 2018 and early 2019, the overseas trading of Reg S-governed ST was discussed by the early industry builders, and the Cabin Capital was also one of them. To most digital currency trading platforms, this is a “kissing gate”. In case the license is not gained or the compliance compatibility design is not complete, the platform will become the major carrier of the transferred risks. At present, this trend is still in the desiderative stage.

Before DX.Exchange mode came into being, the Citigroup announced that it had the intention to launch the “digital asset voucher” based on its efforts of integrating the core property of the global transaction of digital assets with the depository receipt business in the financing operation in the traditional financial market. The two modes have some similarities in principle, and both hope to benefit from the underlying property of the blockchain with global liquidity in nature. In my opinion, the two coincide historically with the current digital security market to some degree. Maybe, DX.Exchange has not realized that its solution provides another solving idea for ST to make breakthroughs in liquidity, whether it is positive or not.

After March 2019, the second trend, i.e. the structural reform based on the DX.Exchange mode or the Citigroup mode, arose. It isolates the actual issuing body from the nominal issuing body. In addition, it combines the features of “depository receipt” business, steers by or seeks the maximum compatibility of compliance, and uses the underlying blockchain technology to manage assets in the field of digital security, thus to indirectly achieve the global trading of ST and fundraising.

As the second trend burgeons “physically”, some derivative phenomenons will arise accordingly, in my opinion. Maybe, there will be chaos. In the range of “development and time”, both the above two trends are structural trends. The essential driver for them is the design of solutions to global liquidity, based on the premise of compliance.

The basic development of digital security industry is subject to the regulatory pattern. The regulatory power has been established in the traditional security industry, not a new emerging force. Largely, the existing regulatory pattern is not the biggest variable. Here, I will not give any discussion about whether the regulation itself will have new changes, but we should show the utmost respect for it.

Affected by the overflow effect produced by the blockchain industry, this industry comes into being to seek the benefit from the compliance combinations in the existing global regulatory pattern. Maybe, this is the real name of STO. It reduces the cost and enhances the effectiveness. The most concentrated variable source driving such “seeking” should be the junction of the digital currency and the digital security. At least the above two trends belong here.

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