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March 4, 2020

Rockaway Blockchain Fund’s View on Security Tokens: Good Value Proposition on a Long Journey to Mainstream Adoption

The period from 2017 to 2019 has seen a boom in ICO (Initial Coin Offering) financing. The 2,100+ ICOs collectively raised ca. $18 billion, but gradually disappeared from the Digital Assets ecosystem. On the contrary, the number of STOs (Security Token Offerings) is rising. We have seen 95 finished STOs, most of them in the US, that collectively raised almost $1 billion from 2017 to 2019. The first half of 2018 was a particularly good time for STOs. Nexo, a digital asset loan platform, raised $52M, and tZero, a security tokens exchange, raised as much as $134M. Although Switzerland and Malta are considered to be the most STO-friendly jurisdictions, 36% of all closed STOs took place in the United States.




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Source: Blockstate STO Report

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What are Security Tokens?

Security Tokens are traditional assets like equity, debt, derivatives, and real estate in natively digital form, secured by the blockchain technology and subject to regulation of security laws. This also includes pre-launch utility tokens that are considered securities by the SEC. The main use cases of Security Tokens are as follows (sorted by relevance):

  1. Access to New Investors: Most attractive investments are currently only accessible to qualified investors. Retail investors are limited mainly by the minimum required size of investment. Security Tokens allow for fractional ownership of assets. Instead of buying a whole flat, residential real estate investors can purchase a small share in 10 flats, thus achieving diversification benefits that are normally only accessible to bigger buyers.
  2. Liquidity of Alternative Assets: One of the defining characteristics of alternative assets like real estate and private equity is low liquidity. Tokenization and subsequent listing at exchanges would significantly help lower liquidity risks associated with alternative assets.
  3. Automation: Instead of having to pay rent to every investor in the tokenized residential real estate separately, tenants can have the rent be sent automatically to each investor.
  4. Coherent Infrastructure: Instead of having to go via multiple platforms or dealers with significant time lags, an American investor can invest in a European bond using a common global infrastructure, thus reducing transaction costs and increasing transaction speed.

A whole ecosystem has developed around these use cases, with categories that can be broadly divided into 1) Securitization Platforms; 2) Exchanges; 3) Custodians; and 4) Analytics:


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Source: Rockaway Blockchain Fund Internal Research


However, if we look at monthly traded volumes of Security Tokens on major security token exchanges like tZero and Open Finance, it is clear that we still need to wait some time for Security Tokens to gain any real traction. There are 2 main problems inhibiting the adoption of Security Tokens:

  1. Lack of Blue-Chip Assets: Beyond lack of liquidity and unclear regulatory environment, an additional problem is a lack of good quality asset to invest in. In terms of STOs, 75% of successful STOs (that met their soft cap) are parts of the Security Token ecosystem. Although tZero, the most successful STO, raised $134M, it produced losses of $10M in Q2 2019 ( as it is still struggling with low liquidity. Other STO successes include projects like Mt Pelerin (a company trying to construct a bank on the blockchain, with Q1 2020 revenues of $800k, according to or Neufund (an STO platform that raised 3.4M EUR by selling its tokenized equity, but only raised 15M EUR via STOs on behalf of 3rd parties). These projects are still not very profitable, as they’re very early in the game, which means that their tokenized equity is not particularly attractive for investors. Although the activities of these projects are commendable, the underlying assets are not attractive enough to draw interest from large institutional players or the general public. More high profile assets need to be tokenized for the public to take interest.
  2. Lack of Liquidity: The top 2 Security Tokens exchanges tZero and Open Finance only have $280k and $25k monthly trading volume respectively. If an investor wants to buy or sell a Security Token, they have to face the challenges of wide bid-ask spreads, which makes it difficult to get in and out of positions. This prevents investors from entering the Security Tokens space.

The big question is what will the main drivers of adoption of Security Tokens be? We have identified 2:

  1. Die Hard Fan Bases (for retail investors): Think tokenized football clubs or future revenues of music artists. To mainstream investors this might not make much sense, but sports and music fans are willing to pay a premium or bear a greater amount of risk in exchange for emotional value of such ownership. If enough such people accumulate and create demand for Security Tokens, the infrastructure will be incentivized to be built and tokenization of more traditional assets can follow.
  2. Traditional Exchanges (for institutional investors): Big exchanges like New York Stock Exchange and NASDAQ can provide Security Tokens with credibility and attract institutional investors (although this is a less likely road to adoption than the previous Point №1). The London Stock Exchange (LSE) has allowed technology company 20|30 to sell shares worth around £3 million ($3.9 million) in tokenized form in 2019. The transactions were settled in LSE’s test environment called Turquoise. Exchanges are incentivized to experiment with the blockchain technology, as there are additional benefits for them, such as elimination of need for clearing houses, which makes transactions cheaper. Furthermore, NASDAQ invested in Symbiont, a startup building the Security Tokens infrastructure for exchanges and financial institutions, and LSE invested in Nivaura, a startup allowing for automated issuance of bonds on the blockchain.

Synergies with Decentralized Finance (DeFi)

Interoperability of Security Tokens with the DeFi ecosystem will make the alternative financial ecosystem complete. Once reached, it will be a major milestone after which it is very likely that DeFi can get mainstream adoption. We will be able to tokenize revenues, equity, debt, derivatives and alternative investments. This means that more assets will be available to borrow against in a risk free way in Compound, MakerDAO, etc. Overall, more assets will be traded on exchanges and liquidity aggregators like Uniswap. This will make the DeFi ecosystem more robust and efficient and decentralized financial services will be cheaper, faster and more accessible.


In order for Security Tokens to take off, we need to see 1) Tokenized blue-chip assets that investors want; 2) A functioning and lively infrastructure made of exchanges, custodians, market makers and Security Token issuance platforms with clear regulatory guidelines, and 3) Interest from institutional and retail investors. However, this poses a chicken-egg problem as one will hardly happen without the other. Therefore, we believe that a thriving Security Token ecosystem is still at least a couple of years away.

Special thanks to Dusan Kovacic, Rockaway Blockchain Fund’s CIO, and Viktor Fischer, Rockaway Blockchain Fund’s Managing Partner, who provided invaluable input and expertise.