Can Security Tokens Save Crypto From the Bear Market Blues?

"Security tokens will save crypto."

That's what Trevor Koverko, CEO of the crypto project Polymath, told CoinDesk at a blockchain technology festival in Toronto this week. There, tokenized dividends were the week's hot topic, even despite the bear market in August in which bitcoin and ether prices dipped to below $6,000 and $300, respectively.

But Koverko was far from alone in his views. Alan Wunsche, CEO of the crypto startup TokenFunder and co-founder of the industry consortium Blockchain Canada, told CoinDesk he believes tokenized assets are the future of capital markets.

From Fintech Canada to the Blockchain Futurist Conference, hundreds of people were buzzing about how Canadian regulators are allowing a few heavily regulated startups to sell tokenized securities to retail investors and institutional investors alike, as long as issuers conduct thorough know-your-customer checks and disclose numerous risks.

On Thursday, Polymath even announced several startups will launch security tokens through its blockchain marketplace. Further, its partner CORL, an investment startup among the announcement cohort, plans to distribute earnings to investor ethereum wallets directly via smart contracts. TokenFunder took the same approach with its regulator-approved token sale in April.

Koverko said tokens are decoupling from "risky" transactional assets like bitcoin, which he believes are currently backed by speculative value and not "anything real" regulators can measure. However, he is hardly the first to suggest token startups and bitcoin projects are diverging, both culturally and legally.

Bitcoin Core developer Eric Lombrozo tweeted his belief in May that while the cryptocurrency movement is about advancing self-sovereignty, token projects focus on tokenizing equity and physical goods.

"It's not about the techy cypherpunk movement at all. It's about yielding to the man. We have to obey the rules," Koverko said, adding the sheer scale of new investment offerings is exciting in its own distinct way. "We doubled the market for security tokens overnight."

In an interview, Canadian parliament member Dan Albas said lawmakers are reviewing regulatory standards related to anti-money laundering checks, keeping cryptocurrency in mind. He expects more know-your-customer requirements are in the pipeline for Canadian bitcoin projects as well.

He told CoinDesk:

"You cannot just have a scanned copy of someone's driver's license and a picture of them and claim you know your client. We need to bring the norms and standards of the Canadian financial industry to facilitate more choice in the market."

Yet not everyone is on board with efforts to institutionalize Toronto's blockchain scene.

Crypto veteran Joseph Weinberg, co-founder of the financial services platform Paycase and chairman of the trusted data network Shyft that Polymath is also partnering with for token offerings, told CoinDesk overzealous regulation could "kill the whole ecosystem."

Lessons from ethereum

Lawmakers might be prudent to recall lessons from Toronto's crypto history.

Toronto was the birthplace of ethereum, but Albas speculated the Ethereum Foundation was founded in Switzerland because that jurisdiction has more lenient tax and regulatory obligations. As such, many believe the regulation craze now sweeping Canada could make or break Toronto's future as an open source community hub.

"I think many of the [ethereum] founders and employees actually live in Toronto," Albas said. "That signals to me there is something in the Canadian system that didn't facilitate their growth dreams."

Albas said he hopes fellow lawmakers will ask whether there is evidence Ontario's different approach to such policies actually benefits the public. Although, as a conservative member of the House Finance Committee he favors minimal oversight, Albas will face an uphill battle.

Weinberg, who works with local regulators in addition to advising regulatory bodies abroad, described the working draft of a new proposal by Canada's Financial Transactions and Reports Analysis Centre as "insanity" that could have "royally screwed" the local blockchain industry.

The draft guidelines would have required crypto startups involved with any transactions worth more than $10,000 to adhere to even stricter standards, handing over indiscriminate customer data to regulators on a routine basis. Backlash from the crypto community forced lawmakers to reconsider these measures.

In the meantime, Weinberg remains cautiously optimistic about the prospect for both cypherpunk and institutional blockchain innovation in Toronto. Comparing the local scene to Silicon Valley or New York City, Weinberg said Canadian competitors are more likely to collaborate. He told CoinDesk:

"The most interesting thing about Toronto, and Canada more broadly, is despite this regulatory pushback, or in a way it's actually representative of it, is that because Canada is so small we have a very good ability to work together."

Image of "doge consciousness" art car at the Blockchain Futurist Conference via Leigh Cuen for CoinDesk