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Security Crypto Tokens: The Dawn of Blockchain 2.0

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If 2017 was the year of ICOs and utility tokens, 2018 was the year of security tokens. If blockchain analysts agree on just one thing (and they don’t agree on many) for 2019, it is that the time for security tokens is upon us. Mirroring the timeline for ICOs, when 2016 saw the market heat up and 2017 was a blockbuster year, 2019 seems poised to be when security tokens hit the mainstream. Recognizing this trend, Edgewater Markets, an industry leader in electronic foreign exchange aggregation and distribution, is launching an institutional crypto-trading aggregation platform to cater to the requirements of institutional money managers and traders round the globe. It’s called Edgewater Coin. In a conversation with Mike Naylor, MD at Edgewater, we explore how they are incorporating security tokens with their business expansion into crypto.

Edgewater Coin: Crypto for Financial Institutions

Egdewater Markets offers proprietary trading technology that executes close to $10 billion fiat trading volume daily. The company has an international trading network with data centers in New York, London, Mexico City, and Tokyo with an experienced professional team of 65 globally. The company had raised $30 million in 2016 from a private equity player, FTV Capital. With Edgewater Coin, the company will diversify to serve its institutional clients in trading cryptocurrency assets. The parent company will share its proprietary technology with the startup and chip in clients interested in crypto trading from its vast clientele of ~300 clients in ~50 countries.

Edgewater specializes in aggregating fragmented liquidity for institutional investors. It provides tailored FX and precious metals liquidity to its international client base via an extremely broad network of technologies. A leading non-bank foreign exchange liquidity provider, it provides optimal, efficient, and low-cost FX electronic execution solutions to over 300 institutional clients worldwide.

STO vs ICO Vs Private Equity

Edgewater Coin has raised $2 million from its parent company. It is now looking to raise $20-$25 million through a Security Token Offering. The company is tokenizing a portion of the equity and is valuing the company at $60-$75 million. The offering is structured under 506c and is only open to accredited investors.

It was earlier considering an ICO but was smart enough to predict the regulatory onslaught. When it analyzed itself under the framework of the Howey Test, it decided an ICO was not the right structure. It even considered launching a dual token, but found no apparent value in the added complexity. It wants to be formally in the regulated space by providing investors real value through an equity offering. Moreover, institutional investors do not find any logical reason to invest in a utility token and prefer understanding the cashflow projections and valuation models behind the company’s equity.

The startup could have also gone through the private equity route but believes that STO is a better, cheaper solution for all involved. Not only does it give investors liquidity after just a 12 month lock-in period, the costs associated with the offering are a fraction of any other comparable liquidity event such as an IPO.

Token holders will have a right to dividends when declared and all other normal equity owner’s right in the company. The details are specified in the company’s private placement memorandum.

Edgewater’s Institutional Strategy

Edgewater wants to improve digital asset trading efficiency. By putting Edgewater Market’s proprietary technology to use, they hope to improve institutional trading expertise, increase transparency through existing relationships, enhance price discovery, and reduce transaction costs for institutional customers.

Security Token Exchanges are starting to come online. Though tZERO has been delayed, the emergence of exchange platforms is inevitable. The regulatory environment is evolving and STOs should find broader support in the market as compared to ICOs.

The Future of Security Tokens

The company expects to hit operating profitability in the first 6-9 months of launch. It expects to be cash flow positive within the first couple of years. Despite the selloff, the company is bullish on crypto and believes the industry has a long-term future. Moreover, it is a service provider and directly does not bet on the market. Trading volume, not trading direction, drives its business. The company had a similar experience when it launched its fiat business 10 years ago. It was profitable right from the start and expects the same to continue for its new venture.

Security tokens provide automatic compliance via smart contracts, interoperability with other ERC20 tokens, and global, 24/7 liquidity via token security exchanges. Edgewater plans to list its security token on token security exchanges. Edgewater is not alone in recognizing the advantage of going through the STO route for raising funding. STOs are a better bet than ICOs, but the real kicker is that startups like Edgewater (and their investors) have begun to realize that STOs offer a faster route to liquidity and at a fraction of the cost associated with a public issuance.


Written by Heena Dhir.

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Allen Taylor

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