For the last century, the financial world has remained largely unchanged. The very instruments that drive our financial prosperity have evolved minimally compared with virtually every other sphere, from the way we communicate and navigate, to the way we consume goods and services and receive medical care. The initial groundwork for modern financial instruments, like stocks, were set in the 17th century. The European creation of these instruments culminated in what we now consider to be traditional asset classes, like equities, commodities, foreign exchange, and fixed income.
The financial crisis of 2008 highlighted the need to adapt the global financial system to the 21st century, and over the past weeks we’ve seen the latest development in that process with the Israeli-led INX Exchange announcing the first digital asset IPO to ever be cleared by the US Securities and Exchange Commission.
What exactly does that mean? Let’s rewind to 2008.
Following the 2008 financial crisis that exposed the true power that Wall Street had, and still has, to influence the overall economy, a person going by the pseudonym “Satoshi Nakamoto” developed something we now know as Bitcoin, a secure digital currency based on cryptography and blockchain. The novel form of currency was grounded in the desire to create greater financial participation and a trustless system that would take economic control out of the hands of Wall Street and put it into the hands of masses. Bitcoin spawned the creation of other digital currencies, such as Ethereum and Litecoin. It also spawned the concept of digital assets.
As crypto and blockchain thrived, many companies in the budding industry used Initial Coin Offerings (ICOs), a tokenized version of Initial Public Offerings. to raise funds. They would offer “tokens” as a sort of investment in their company – a form of crowdfunding, but such ICOs weren’t regulated by national governments and, as such, led to numerous exit scams. Nevertheless, the idea of offering blockchain-based ownership to investors caught on, as the distributed ledger offered security and efficiency unrivaled by current systems on which people invest in stocks and other assets.
Finally, this new asset class, called a “security token,” has been cleared by the SEC.
ENTER INX, the digital assets exchange led by an Israeli entrepreneur
Gibraltar-based INX Ltd., founded by Israeli investment and finance veteran Shy Datika, received SEC-clearance for its security token IPO, ahead of listing it on its digital assets exchange. The move marks the first time US retail investors can invest in the novel asset class and is expected to spur similar security token IPOs from other companies. Tokens offer more utility than traditional stocks and diversity. For example, investors can buy into a specific company project or own a stake in a particular asset of a company, rather than buying stock that represents a share of the entire company. More simply, it’s a financial asset class for a company to raise money, but without having to sell off shares of the whole company to do it. Others had tried this before, but to limited success.
Around 2017, a wave of ICOs kicked off a new era. Many of these offerings turned out to be fraudulent. Only 48% of ICOs were successful that year, meaning the investors of the other 52% lost every penny they invested. ICOs, which had lost the trust of investors, were missing the backing of a centralized authority that could regulate the market. More recently, Security Token Offerings (STO) emerged as a potential candidate to bridge the gap between centralized regulation and blockchain financial instrumentation. But these were not available to retail investors until now.
The SEC’s nod to security tokens through INX follows the natural path of financial evolution that we’ve seen historically. Equities sold by Dutch sea merchants in the 17th century were banned until 1825 after they failed to pay dividends in 1720. What was missing was regulation. Analogously, ICOs introduced an entirely new asset class, but these were quickly banned or dismissed, because they failed to have the legitimate backing of SEC-registration or institutions of the like.
What remains to be seen is how many large corporations and retail investors will join the fray. Should the large corporations, such as Tesla, Apple, Google, Microsoft, Amazon, and others, list their assets or projects on INX, the platform will get a massive boost.