STO market history: from origin to mass adoption
The STO market is a relatively young field, but it has already become a vital element of modern finance. Although it is still undiscovered by the mass audience and is still somewhat disruptive, it has already gone through a couple of stages in its history: namely, there have been three.
Proof-of-Concept (POC) stage (2018)
The industry of security token offerings was born as a regulated form of Initial Coin Offerings, not as a disruption of traditional capital markets in which it has evolved. After the ICO hype was over, people started realizing that most ICOs did not deliver on their promises since they weren’t regulated and did not create any obligations for issuers ― thus, the majority of investors weren’t interested in them. A security token offering came into play as a regulated alternative to the Initial Coin Offering. However, it became clear in a while: STO is pretty much an alternative to all traditional finance.
The first cases of STO were mainly conducted in the US or offshore jurisdictions and were aimed to set a pattern of how it works. At the same time, the offering had to not fall under the very complex regulation. The pioneer tokenizing cases were Aspen Resort ― the very first case of real estate tokenization; 22X and Blockchain Capital were the first tokenized investment funds.
The first security token offerings have been a success, and many companies and issuers flooded into the industry to take advantage of the opportunity. The expectations were very high, and, naturally, they had not been fulfilled: the STO market was going through the initial hype and disappointment cycle. At first, everyone engaged in this technology expected that the industry would be growing exponentially. Still, it didn’t appear to be such an easy path to walk: as the STO initiatives are regulated, they are accordingly more costly and complicated. Besides, finding an investor was a huge struggle at the time, as the market wasn’t liquid enough, and security tokens were something very new. The additional complexity of doing it for the first time made many businesses, who had already started conducting their offerings, leave it halfway. Due to such structural barriers, original expectations for this industry to develop rapidly weren’t met, and STO market size didn’t increase.
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Fighting structural barriers to let the industry grow (late 2018 ― early 2020)
At the second stage, industry participants, including Stobox, have been focused on overcoming the structural barriers so that the industry could grow. Let’s go through those barriers in more detail.
The adoption of legislation in multiple countries was the first milestone to accomplish. A lot of industry representatives and lobby groups in different countries worked together in favor of STO legislation to be adopted and regulatory guidance to be developed. Such groups consisted of various organizations and associations like Crypto Valley and Global Digital Finance, and private companies that were interested in moving the industry forward. Thanks to these efforts, a regulatory framework came into play. It enables storing securities in the digital form, protects investors, and is responsible for many other essential functions.
The second meaningful achievement was the rise of the service provider ecosystem and accumulation of expertise by them, which eventually led to a dramatic price reduction. The first security token offerings could easily cost up to $500,000; today, the price of an average offering is 5 to 10 times cheaper thanks to the competition among service providers and the accumulation of expertise.
Stobox stepped into the game during this stage: though our company wasn’t involved in the Proof of Concept stage, we took on when many people left the industry in disappointment. We had seen the long-term perspective over here, which made us start working on the comprehensive STO solution.
Related: Successful STO: step-by-step guide
The rise of secondary markets is a third significant trend. Trading security tokens wasn’t possible due to the lack of exchanges and legislation on the matter. Throughout the years, the STO evangelists were working on obtaining the exchange license in various jurisdictions ― the pioneers of this process were OpenFinance, Archax, ISTOX, and others. Alternative sources of liquidity like DS Swap were also starting to emerge. The token illiquidity barrier was overcome when the exchanges began receiving their first licenses.
Higher crypto adoption among investors was the final necessary accomplishment at this stage. An enormous effort of the STO and crypto communities put into the educational direction was a crucial element that changed the general distrust and lack of confidence in crypto instruments. Now, many brands, such as Tesla or Goldman Sachs, have adopted crypto as a payment method or started investing in it. Consequently, investors were served with a brand new and legitimate asset class, tokenized assets, and their general wrong assumption as scam projects were eventually wiped out.
Successful destruction of the old barriers eventually led the STO market community to the next stage, which is taking place right now.
Early exponential growth (2020 and beyond)
Although this process isn’t tangible yet, the industry is growing exponentially as you are reading this article. While exponential growth is starting, it isn’t as traceable as linear growth. Only in the later stages, when all the best possibilities are already taken, will everybody notice that exponential growth has actually been taking place all along. How can we see that it’s happening right now?
The first noticeable evidence is that all the STO-related metrics grow enormously, accordingly, the STO market size is growing in all metrics. For instance, according to Security Token Market data, in 2020, the growth in STO trading volume exceeded 1,100%, which is over ten times. Furthermore, the other metrics have risen as well: for example, the token issuance volume has grown at least by 200%, and the market cap of the traded security tokens has grown over 500%.
The exponential growth is also recognizable because most major institutions like the Swiss Stock Exchange or DTCC started developing their own solutions in the field of tokenization. The third strong evidence is that many tokenization startups raise extensive rounds that exceed $50 million, which gives them 9-digit valuations. This is only possible when the STO market size is increasing.
The industry has overcome the structural barriers and has come to the point of solid and confident growth. Today is the best time to enter the STO market and start developing your company’s offering and benefit from the future upsides. If you are interested in conducting your own security token offering, request a complimentary 30-minute consultation on our website.