Is Bitcoin going to 0 and what is with security tokens?

Short answer on clickbait "is bitcoin going to 0", No. (Personal opinion of course)

Now let's move on to the next question which wasn't the obvious reason you came... but if you give me your attention for the next while, I promise you to make it worthwhile and impart you with some pretty neat things I learned recently.

You with me?

We have been hearing security tokens for a while, there are platforms such as T0, Polymath, Harbor and the latest, Glass.

What do these mean and what are they really looking to accomplish?

In this article, I'm going to explain in everyday language le raison d'etre for these projects.

Why security token offering

The main reason for security token offering is that, investors realize it is better to own a share in the bus company than a bus ticket.

The issue with securities in general is the difficulty to ascertain ownership: It's easier to prove that you own bus tickets than to say you own a piece of the bus company.

When it is merely a bus ticket, you just have to get on the bus and see if your ticket is accepted. If it is, you have proven your ownership of something that is valuable.

This value is limited to what you can use the ticket for. If the bus company decides to expand and get into the taxi business, and don't allow you to use your bus ticket for the taxi, you get no upside for the bus company's expansion.

Generally speaking, as an investor, you want ownership of assets. When you own assets, they produce income.

Here's an example about what it takes to prove you own a share:

Like your neighbors or your friends or yourself who are buying houses and renting them out, you could buy a share of a company that will pay you dividends and allow you to earn income.

If you ever ventured down the lane of buying a home, then you realize how much legal documents are involved. You have to make sure that the person selling you the house actually owns them, and declares any previous lien that's attached to them.

When we take this up a level to companies shares, we are talking about the whole securities industry which includes: your bank who holds your money, the stock broker who broker the purchase and sale of shares (they could be an electronic platform, registered as a brokerage firm), the company issuing the shares, and the regulators overseeing that everything is fine and dandy.

With cryptocurrency and blockchain tech, we have now a way for everyone around the world to get access to value and trade it at a level of potential access and liquidity as ever before.

I say potential, because most of the projects listed on Coinmarketcap is shit, and you shouldn't touch them with a 12 foot pool. I speak from experience, sadly...

Even with all of the shitcoins in the market, one cannot refute the technological advances to provide the potential liquidity and access that we were promised by blockchain tech.

This is the foundation of the rest of my argument: Fundamentally, blockchain and cryptocurrency or tokens, has the potential to increase liquidity and access to markets for investors around the world.

Okay, so the vision is 24/7 trading, anywhere by anyone around the world.

You with me so far?

What we need is a clear legal framework to operate in. Here's proof.

The JOBS Act

When the U.S. introduced the JOBS Act, the market has seen an increased in the number of retail investors getting into earlier and earlier stage investments.

These are real estate deals that they couldn't get access to, these are also some of the earlier stage equity founding rounds for startups.

One of these startups actually did an IPO, greatly rewarding those who have invested early into the start-up. Just Google: Reg A IPO.

Bearing in mind the probability of a start-up going from angel rounds all the way to IPO, the JOBS Act have allowed retail investors to play in the same field as institutional and accredited investors.

It would be reasonable to argue that having a solid and clear legal framework around equity crowdfunding, created better access and better liquidity.

Before we jump into some of the obstacles about security tokens, let's explore an important concept.

What is the difference between retail and accredited investors?

If you ever read anything about security token offerings you probably came across accredited and retail investors.

Accredited investors are basically individuals who have the money to lose. Generally speaking, they have over a couple million dollars in assets AND earning more than a quarter million a year. They are a fraction of those considered to be the 1%.

The investment opportunities for these people are vastly greater than the retail investors.

Generally speaking, if there is a deal, and it is still looking for investors, an accredited investor would be able to get into the deal.

Retail investors is everyone else.

It is set-up this way by the regulators to protect the little guys.

Okay, so now retail guys can buy into accredited investors deals, here's the next question...

What are some the basics with respect to issuing securities?

Let's take the US for example. Depending what securities you are issuing there's a cap to how many people you can sell your securities to and where you can advertise.

You can't just register a company, write on a piece of paper "this is a share of my company", put up a facebook ad and off you go getting paid millions for paper.

True story, stocks are also called paper.

What you have to do is figure out how many people you can sell your securities to and how you can advertise.

Under the JOBS Act there is reg S, which means you can sell to international investors who are accredited, reg D means that you can sell to accredited investors in the US and under reg A you can sell to retail investors.

For companies in the states, they can apply under each of these concurrently. The application process is more difficult for reg A because the regulators wants to make sure that only the highest quality of deals goes through. They do this with the intent to protect the little guys.

Generally speaking, this works as intended.

So you have applied under Reg A and S and D and you were able to issue your securities to retail and accredited investors in the U.S, and accredited investors who are in another country, let's talk about the next challenge.

What are the top considerations when trading securities internationally?

Taxes and income.

Let's take Canada and US as an example.

I buy a house in the US and rent it out. I get rent back as rental income. Because the house is located in the states, and the income event happened there I have to pay the US government some tax money.

I'm Canadian, so I'm going to get the money back into Canada so I can spend it. When I get the money back, I have to declare where the money is coming from. It came from my commercial activity so I have to pay tax again.

In this case, I actually don't have to pay taxes because there is a tax treaty between the US and Canada, which means I don't get taxed twice on my income.

This doesn't happen between every country as you can imagine.

Additionally, even if they do have tax treaties, the rates might be different. Countries might also have additional taxes to fight an economical war between each other.

Okay, let's say we get together and create one of these security tokens which represents some real estate that generates rental income.

We get to the stage that we are able to get the license to issue these securities token to everyone and their uncle.

This is good for us because we have all their money in our pockets, but it's going to be a nightmare when everyone starts trading them and trying to keep track of all the taxes and dividends.

Imagine we issue out of the US, some Japanese guy buys it, there's a tax treaty between Japan and US, great. Then the Japanese guy sells it half way through the quarter to a woman from Australia, which does not have a tax treaty with Japan. Would it actually be worth it for the women in Australia to buy directly from the Japanese man, or would it be better for her to buy it from another US token holder?

What a mess...

How do we untangle all of this mess?

Fundamentally, securities is about ownership. It's one thing to say that you are a man of your words and issue 100 shares to your close friends and family for your new start-up, it's another to say that to complete strangers all around the world.

Regulators' job is to protect the little guys, but also allow positive economic activities to flourish. (Evidence might suggest otherwise.)

Let's take property rights for example, the right to own a piece of land or real estate.

The issue to property rights is that it gets political. For example, in China, Chinese citizens do not have property rights.

You know that we don't actually own fiat currency. We are the legal tender of that piece of paper. It's actually against the law to burn it or destroy it. (You knew that right? ;)

Same with Chinese apartments, the buyer have usage rights for a number of years, and if the government wants to take it back, they just take it back.

Each of the security token platforms out there are looking to untangle this mess and allow retail investors to purchase and trade internationally, 24/7 with each other.

Some are doing it on a token level, some are doing it on an exchange level, some are partnering up with existing players in the securities industry and deploying blockchain tech to make everything seamless (smart move).

This is not the first time that the world wanted (needed) a clearer framework around securities regulations.

The other time was when the EU was formed and 26 countries got together and HARMONIZED all of their individual rules to form a standard securities framework which allowed for better access and liquidity around the markets. (also less headaches for lawyers and accountants!)

In Conclusion

If you have read this far and followed everything, you are awesome. To tell you the truth, I still don't understand everything.

My hope is that you got a glimpse into the complexity of the issue, but also the vision that crypto and blockchain is meant to bring.

Until next time.

Thank you for reading.

P.S.

It takes me time to come up with these topics and write at the best of my abilities with the half of a brain that I have, I can only reach so many of you just by myself.

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