International law firm, King & Wood Mallesons (KWM) hosted a recent event in Dubai International Financial Centre to shed light on an increasingly popular method of raising project funding - Security Token Offerings (STOs) - and why there is a need for increased regulation in the FinTech space.
Key speakers at the event included Shawn Davis, partner at KWM, Danish Chotani, CEO at multi-line corporate and investment advisory boutique, Burj Financial, and Andrew Rippon, co-founder and CEO of tokenisation platform Thrupny.
The UAE’s Securities and Commodities Authority approved Initial Coin Offerings (ICOs) as securities in 2018 and, in collaboration with the Abu Dhabi Securities Exchange and Dubai Financial Market, will develop trading platforms for ICOs and STOs in 2019. The rules for ICOs are expected to be finalised by mid-2019 and the UAE is positioned to become a destination of choice for blockchain-related businesses.
ICOs and STOs provide a source of crowdfunding to both start-ups and mature companies. However, instability in the crypto-market and uncertainty surrounding utility tokens, such as Bitcoin and Ethereum, is deterring investors. According to CoinMarketCap data, the total market cap for cryptocurrencies on February 10, 2019, was over US$123bn, which is a 69 per cent decrease from the previous year. CoinTelegraph data indicates that although the number of ICOs concluding in 2018 rose by 136 per cent from 2017, the economic results were less impressive. The total amount raised only increased by only 13 per cent to $11.4bn. This unpredictability and lack of regulation have led many organisations to explore alternative funding methods.
Rippon explained how STOs are growing in popularity among investors and projects seeking funding. He said: “STOs offer an alternative to ICOs. The latter involve issuing tokens that are not necessarily based on anything other than the model of the business. Therefore, the tokens are not giving the investor ownership of the business. STOs, however, can use a lot of the regulations that were already in place. STOs are blockchain-based tokens, just like ICOs, but they are actually structured to be backed by equity of the company or specific assets.”
According to Rippon, companies can take a portion of their equity and place it into trust to issue tokens. A security token entitles the owner to a share of the profits of a business, a stake within the business itself or some other form of reward in exchange for the initial investment. STOs are always backed by a tangible asset, reducing the risk to investors falling prey to fraudulent business practices and scams. Furthermore, companies can issue STOs in a relatively short time, at a lower cost than a traditional IPO and investment is open to the global market.
Although STOs offer investors more security, Chotani warned there is as much need for due-diligence as with ICOs. “We can see that risk assessment is becoming a key driver for investors in terms of where they put their money and being aware of the associated risks,” he said.
“We also see more caution at a government-level. Dubai has always been very proactive and progressive in adopting new technologies. Through thorough examination of the value proposition of projects seeking funding and increased regulation, we want all fly-by-night operators, those with weak technologies and those who do not have the investors’ best interests at heart, to be filtered out as soon as possible. This will leave us with prime projects and will ensure investors enjoy a more secure environment,” Chotani summarised.
Davis added: “Dubai has emerged as a leader in the Middle East FinTech space. The Dubai Government is looking globally at lessons learned as regulations are being developed, considering how to protect investors and ensure longevity.”
Davis continued: “The UAE sits firmly as a global leader and continues to make significant progress in regulatory frameworks supporting the growth of STOs. 2018 saw the launch of Emirates Blockchain Strategy 2021 to improve the legal framework of FinTech solutions. In January 2019, Dubai International Financial Centre and Abu Dhabi General Market were named as key members of the Global Financial Innovation Market, further demonstrating the region’s commitment to supporting new technologies and driving digitisation.”
The FinTech breakfast event, sponsored by SevenCapital, attracted over 40 attendees, which is evidence that local interest in FinTech and Blockchain’s utility is growing.
Davis said: “One of the reasons I decided to start these FinTech breakfasts was I noted in the market significant interest and forward-thinking by the Dubai Government in terms of a platform for regulation, protection for investors and also a very strong focus on governance.
“There is an increased need for regulatory advice, review of white papers and, because it is an evolving space in the market, analyses for investors of different jurisdictions. One of the challenges faced globally concerning the regulatory environment is that there is a multitude of regulators, who are not necessarily interacting in a way that allows investors to clearly understand which regulations prevail or take precedence over the others. Moving forward, as we see collaborative efforts with Europe and other geographies, that will improve. These events aim to increase awareness and provide clarity for businesses making decisions about utilising blockchain technology and investors considering technology platforms and tokenised offerings.”
The Dubai office of King & Wood Mallesons is strategically placed to serve global, regional and local clients across a wide range of sectors throughout the Middle East, Africa and Asia across corporate, mergers and acquisitions, securities and dispute resolution.