1/ My last thoughts on security tokens & then I'll stop triggering everyone trying to shill their STO products here:
I agree it's possible to eke out some efficiencies by putting any financial instrument on a blockchain, & yes, disrupting central securities depositories is neat.
I agree it's possible to eke out some efficiencies by putting any financial instrument on a blockchain, & yes, disrupting central securities depositories is neat.
2/ To me, this fits the blockchain use case of "companies can save a few dollars by automating their back office."
That's fine! Nothing wrong with that!
It's just not particulary interesting in the broader context of crypto, & it gives off a very "blockchain, not bitcoin" vibe.
That's fine! Nothing wrong with that!
It's just not particulary interesting in the broader context of crypto, & it gives off a very "blockchain, not bitcoin" vibe.
3/ What *is* interesting, maybe revolutionary, is allowing self-custody of financial instruments & exposing them to the composability of open protocols.
The problem is that security tokens are somewhat unfit for these goals, not only due to regulation, but by their very nature.
The problem is that security tokens are somewhat unfit for these goals, not only due to regulation, but by their very nature.
4/ Self-custody is extremely powerful for bearer assets like bitcoin, where the holder of a private key has an absolute, uncensorable property right to the value of the asset.
Security tokens aren't that; they derive value only if the issuer (a trusted third party) says they do.
Security tokens aren't that; they derive value only if the issuer (a trusted third party) says they do.
5/ Composability is also tough for security tokens, at least for now. This is largely due to regulation (in the US context) but not entirely.
For example, true composability means possession by pseudonymous parties, which is incompatible with owning shares of a corporation.
For example, true composability means possession by pseudonymous parties, which is incompatible with owning shares of a corporation.
6/ Composability also means irrevocable transactions.
If a holder trades security token X for asset Y on a DEX, the issuer can't unwind the trade, even though the ability to do so is often necessary.
Composability is permissionless, but security tokens must be permissioned.
If a holder trades security token X for asset Y on a DEX, the issuer can't unwind the trade, even though the ability to do so is often necessary.
Composability is permissionless, but security tokens must be permissioned.
7/ To be fair, you can solve these problems by designing new semi-composable protocols that allow some types of interesting transactions.
But these would have to be highly restricted; subject to (most of) the same intermediation & oversight as the old system. Again, that's fine!
But these would have to be highly restricted; subject to (most of) the same intermediation & oversight as the old system. Again, that's fine!
8/ But it's a far cry from the zero-to-one innovation that blockchains offer elsewhere, e.g., decentralized money.
It may be a case where a blockchain is better than an Excel spreadsheet or SQL database, but by how much . . . ?
It may be a case where a blockchain is better than an Excel spreadsheet or SQL database, but by how much . . . ?
9/ I admit I may be missing the point & I'm open to being convinced otherwise (especially if there's something really exciting to see here).
But right now, to me, this feels like another version of "sprinkle some blockchain on it" hype years away from proving its promise.
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But right now, to me, this feels like another version of "sprinkle some blockchain on it" hype years away from proving its promise.
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