There are a number of basic conditions, or pre-requisites that I have proposed as necessary for a functioning investment market, namely parity between investors, legitimate governance, executive accountability, minority protection, appropriate disclosure and founder incentives that are triggered only on success.
Not unsurprisingly, there have been no explicit challenges to the proposed conditions (regardless of the continued issuance of mostly worthless utility tokens) but there have been several comments that the conditions essentially describe equity and tokenizing this is largely pointless. Michael Kogan in his essay addresses the same theme and argues that most of the characteristics attributed to Security Tokens are not different from what can be achieved by non-tokenized securities. Kogan’s point that we should primarily look to tokenized securities to do new things; which we could not accomplish with old means is particularly relevant and worth expanding on.
Why not stick with equity?
Many of the drawbacks of equity relate to its background as the core liability of a corporate entity. The key representation of the firm is the balance sheet, one side of which is equity (before the introduction of debt) while the other side captures the assets of the firm (thus Equity = Assets). Equity gives an implicit right to the value created by the firm, but explicitly it does so through a right over the assets, which are seen to underlie the value creation. All of this is then captured by the theory and practice of accounting.
In essence, equity as a concept is integrally tied to the other concepts of firm, assets and asset returns and our accounting (GAAP, IFRS, etc.) representations of the above. Tokenized equity, or security tokens, allow us to transcend those concepts.
Security tokens allow us to define equity type relationships that do not need to be tied to the existence, or current definitions of the above concepts. This is particularly relevant, as the economic value creation of modern undertakings is no longer based on assets and production but on resolving coordination costs, which is largely an asset-independent activity.
Moreover, we can use the programmable nature of Security Tokens to define almost any kind of economic relationship we wish. Token holders can have an ‘equity-comparable’ stake in a venture, without needing to be equity holders and without the venture needing to have equity.
Re-engineering needs to have a purpose
There is a balance to be struck here. The codified characteristics of standard securities such as equities, bonds and exchange traded derivatives have evolved over long periods of time to match the requirements of market participants. The same applies to accounting principles such as GAAP or IFRS. Altogether these are an incredible toolkit for reducing friction and transaction costs in markets. That we have the ability to re-engineer these characteristics on an ad-hoc basis does not necessarily mean we should.
Similarly, the pre-requisite investment principles noted in the beginning are not characteristics of instruments — they are pre-requisites for the relationship between investors and investees. The fact that they have been largely pre-engineered into our public markets and into standardized securities does not mean that parties should wilfully engineer them out, even if given an opportunity to do so.
Complexity can be captured in layers
There continue to be few practical examples of security token issuance, thus leading to an unsatisfactory empirical answer to the question of ‘what is new?’. This, however, is likely to change as the token market becomes regulated and the utility token market stumbles in its own contradictions.
Securing secondary market liquidity for security tokens remains one of the key practical needs. In principle, all securities are tradeable but in practice, the only liquid securities are the stocks and bonds that have been applied to be publicly listed, and even on public exchanges liquidity tends to be found only in the issues with the highest capitalizations.
It is a pipe dream that all tokens would be part of an interoperable market, or that any market would have natural liquidity. However, the very structure of tokens allows them to capture diverse properties within a homogeneous wrapper.
Specifically, the financial complexity is captured in the financial logic layer of the token architecture (typically engineered as a ‘smart contract’), without compromising the ability to retain homogeneity, replicability and simplicity in the other layers (typically properties of the underlying blockchain). This should lead to a simpler and more cost effective process of both issuance and secondary listing for these instruments, in comparison to other securities with similar properties.
 Ristimaki, S. Tokenomics — the shortfall of the protocol investment thesis. https://medium.com/@sasuristimaki/tokenomics-the-shortfall-of-the-protocol-investment-thesis-4abee5c2c850
 Kogan, M. What the Heck Are Tokenised Securities? https://hackernoon.com/what-the-heck-are-tokenised-securities-7cd1123cbdad