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Deloitte China Says STOs Offer Real Solution to Some Fundraising Issues

Security Token Offerings, or STOs, may still be in their relative infancy in terms of development and regulation but they offer a real solution to some of the issues commonly experienced in the fundraising process, Deloitte China has noted in its latest installment of its white paper titled “Advantages of security token offerings”. 

In its first white paper “Security token offerings: the next phase of financial market evolution” in October 2020, the firm sought to give an understanding of the future development of STOs – as the combination of blockchain technology and the requirements of regulated securities markets to support asset liquidity and the wider availability of finance – in the financial industry. 

Globally, the total level of funds raised from STOs now exceeds US$360 million, according to STOMarket.com

The fundraising mechanism offers securities in a blockchain environment that involves the creation of, and transaction in, digital blockchain tokens which could be applied to financial or non-financial assets and with the token backed by these assets.

Meanwhile, while some countries and top global banks are opening up to its idea as an emerging fintech solution, including the second largest bank in the world, the China Construction Bank and the Bank of China, countries like China seem to have a frosty stance on STOs to say the least – though there are talks of regulation for the sector. 

One of China’s top officials declared them illegal at some point but later shared that they can be launched within a strict regulatory sandbox mechanism though with a claim that the DC/EP can play a role in solving the pain points of traditional payment. 

The new Deloitte paper identifies pain points of traditional capital raising channels faced by market participants including their being built on decades-long financial infrastructure which increases the cost associated with fundraising. 

The expensive cost, coupled with a lack of real-time information for investors in the private markets leading to “cumbersome, duplicative and nontransparent processes.”

The paper also touches on how STOs address some of these issues to reduce structural inefficiencies in traditional fundraising based on few STO case studies using asset classes like real estate, venture capital/private equity funds and bonds.

A number of potential security token issuers, investors and intermediaries in Hong Kong were consulted to survey their views of the development of the STO market for the analysis.

“Best of all, the benefits of STOs are not limited to public issuances of debt or equity. Private placements can take advantage of the increased efficiency and transparency of tokenizing a security. This means that issuers do not have to incur the high costs of a public offering to leverage the cost-efficiencies afforded by STOs,” the COO of HKbitEX, Lin Shi, writes in the report.

The report, with a focus on the use of technology to support the development of better financial systems and markets, was put together in collaboration with the Asian Institute of International Financial Law and digital asset exchange headquartered in Hong Kong, HKbitEX.

 

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