Over the past few years, Initial Coin Offerings (ICOs) have challenged the way people think about venture-financing. Thanks to the power of blockchain, entrepreneurs all over the world are able to issue and sell digital tokens with the promise to channel proceeds into the development of blockchain projects. Ideally, the tokens are ascribed some utility, and the value of that utility (and therefore the token) is expected to grow based on the success of the project. Unfortunately, the past year has been challenging for most ICOs, no thanks to the corruption of the process and breach of trust by fraudulent players.

Notwithstanding the negative developments around ICOs, the merits of the process and underlying technologies have been exposed. Consequently, there’s a broad realization of the immense potential for the tokenization of existing assets on the blockchain, and very serious people are curious about this and paying attention.

The ability to fractionalize any asset and distribute its title seamlessly in digital form holds a lot of promise. It’s easy to imagine the implication of this for trust-less transacting, transferability of ownership and secondary market liquidity etc., but a more immediate positive is that, as with ICOs, it creates opportunities for asset owners to access a wide, fragmented pool of private capital.

Being from a developing market where access to capital is a big deal, and having both raised venture capital and successfully executed an ICO, I’m extremely interested in observing the development of the emerging STO space, and I’ll hopefully be contributing to it over the next few years. Today, I attended TokenMarket’s event on ‘The Evolution of Security Token Offerings’, and I have a few thoughts.

It was a great, educative event, and kudos to TokenMarket for taking the lead with this type of effort. During the meet-up, market education was noted as one of the hurdles the STO sub-sector need to cross, and I agree. Also, since STOs, by definition, fall right under the purview of the various government regulators, a lot of the talk was about compliance, engagement with the authorities and investor protection. This is extremely important and it needs to remain a priority for every stakeholder.

However, I found something a bit disturbing. Platforms like these are promoting STOs and doing the necessary work to make them real, but they might be unwittingly damaging its potential to be truly revolutionary.

These platforms can help companies with the technical and legal pieces of security token issuances. They also usually maintain a marketplace to match asset sellers with a vetted crowd of buyers/investors. In the UK, where TokenMarket is domiciled, for example, retail investors can purchase securities, subject to fulfilling standard KYC/AML requirements and signing acknowledgments confirming that they understand the risks and are not over-exposing themselves financially. This makes sense, at least more than the US accreditation rules.

However, In an attempt to emphasize their efforts towards investor protection and regulatory compliance, these platforms also want to also take on the function as curators (the word “bouncer” was used at the event jokingly). Before qualifying as suitable for “listing” as a security token on TokenMarket, if going by what was said at the event is accurate, then the business has to be evaluated by the TokenMarket team for quality assurance. On the surface, this sounds reasonable, but I paid attention to the factors that were mentioned as suggesting quality, and it was things like “size of the market”, “quality of the team”, “track record of the business/team”, “product”, etc.

While these are important for investors to evaluate before making decisions, a lot of these things are subjective judgments, because, in reality, standards for quality are as diverse as the investors themselves. Leaving agents of platforms to curate the quality or category of assets that are listed will empower them to filter based on their own prejudices and biases, which they are entitled to. It is impossible for the platform teams to be qualified to take positions on the size of the market, or the quality and track-record of promoters because, in most cases, they WILL filter based on recognizability, personal values, and biases (or ability to pay fees, as with many crypto exchanges right now). Problems that are endemic in the VC investing space such as pattern-matching–which results in the exclusion of entrepreneurs that are women, minorities, first-time founders, founders with non-elite or no education, lower class, nationalities, etc.–will be mirrored here.

Now, there’s nothing wrong with filtering investments through personal biases, I’m just saying that they should be personal, and not pre-filtered by others. It can be argued that if the investors on the platform elect to have the assets pre-filtered by the platform, then that’s their prerogative. That’s true, I’ll concede.

However, my belief is that to truly “tokenize everything”, as people in the industry like to say, STO platforms should focus on establishing the legitimacy of assets by verifying the authenticity of claims and credentials, not by valuing them. Things like criminal background checks, references etc., are necessary and objective tools to protect investors. But if a high-school educated entrepreneur claims to run the largest colored-pancake business in Wales and wishes to tokenize their company’s equity,  all the tokenization platform needs to do is make sure the promoter is not a criminal, attempt to verify the authenticity of that high-school credential (if it matters) and other documents, and try to validate the claim about the business’ size. If the claim about size can’t be verified because there’s no database of colored pancake retailers in Wales, they should simply highlight that statement as an external auditor would. They can even go further to give the asset a rating and a review, if the platform’s opinion about the breakfast business is so important to its database of investors.

“Due diligence”, as an investment process, is not for judging data, it is simply for validating and authenticating them. The platform’s responsibility is to ensure that what the buyers think they’re buying is exactly what the sellers are selling.

The judgment about things like the potential size of the business is the entrepreneur’s to make, and it’s their responsibility to convince potential investors that the logic used in determining it is sound. Likewise–and especially–judgment about the quality of the entrepreneur and business model. Who’s to say that there are no fanatical lovers of colorful edibles in Cardiff and Seoul who believe the venture is scalable and would be willing to back the entrepreneur described above if they can only verify that the business is a registered tax-paying entity in Wales?

The promise of STOs, at least for the little obscure guy or entrepreneurs in developing and emerging markets, is that everyone gets a chance and the barrier to capital access is lifted. On the panel at the TokenMarket event, one of the speakers mentioned a fairer alternative. His company (I can’t remember the name) is working on a protocol that’ll enable anyone to tokenize their assets, and for listing, projects are voted into the marketplace by the community. That’s reasonable to me and I hope to see more platforms doing as much as possible to ensure the legitimacy of assets, while ensuring the disintermediation of access to the private capital market. The industry needs technology providers, asset accreditors (like Fitch for credit), compliant but open exchanges (till the decentralized future is realized), etc.

I believe that if the industry just churns out several platforms that are more or less small, blockchain-powered NASDAQs run by people with the faculties of VC General Partners, the security token market will either wane or recalibrate itself and start over the way it should be, but not without huge reputational damage and significant lost time.