Coinbase, the largest Bitcoin exchange in the U.S., announced yesterday that it had acquired Keystone Capital, a financial services firm, in an effort to become a fully regulated broker-dealer. President and Chief Operating Officer Asiff Hirji commented that "Coinbase will soon be capable of offering blockchain-based securities, under the oversight of the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA)."

While the cryptocurrency market delivers countless new headlines daily, this particular announcement is likely to be one of the most significant stories of the year. Historically, Coinbase has traded just four coins: Bitcoin, Bitcoin Cash, Ether, and Litecoin. Now, they are positioned to add blockchain-based securities--otherwise known as security tokens--once granted regulatory approval, which they anticipate in the next few months.

The implication for entrepreneurs?

Security tokens, like equity in a business, can be sold to U.S. and international investors, opening up an entirely new avenue to capital raising.  

When Coinbase makes moves, the ground shakes. With more than twenty million customers and $150 billion in assets traded, the San Francisco-based company has raised $225 million to date, and recently valued itself at $8 billion when it acquired 

But wait: what are security tokens?

Security tokens are digital, regulated securities on the blockchain. Think of them as a form of programmable ownership. Imagine being able to program your capitalization table, dividend payments, voting rights, or liquidation preferences directly into your tokens. Now imagine that the technology to do this exists today--because it does.

Multiple issuance platforms, such as Polymath, Securitize, and Harbor, allow issuers to program these rights and more into security tokens using smart contracts. And the benefits to tokenizing assets are substantial.     

One of the biggest draws is liquidity: the ability to trade tokens on soon-to-be regulated, secondary exchanges such as Coinbase. Whereas as many investors have historically invested in startups with a five to ten year horizon for an exit (if any), security tokens promise near-term liquidity on exchanges that will trade tokens 24/7, and attract a global pool of investors. 

Security Token Offerings (STOs) 

A new breed of innovative startups and established businesses alike are beginning to consider security token offerings, or STOs, as a strategy to raise capital. STO issuers have a variety of securities exemptions at their disposal, including Regulation D 506(c), Regulation A+, Regulation Crowdfunding, and Regulation S, to run compliant offerings. 

While U.S. securities laws are imperfect--and openly frowned upon or despised by some in cryptocurrency--the current framework provides guided pathways to capital raising for STO issuers.

Aaron Wolko, Founder of Green Diamond Ventures, is bullish on STOs. "This is a huge breakthrough for both startups and investors," he said. "Companies looking to raise capital benefit because they can now easily seek funds from investors who are located outside of their own legal jurisdiction, and it protects investors because their equity is now guaranteed by a smart contract."

By tokenizing equity (or debt), entrepreneurs can now sell their tokens to investors around the world, widening both their reach and target audience. And investors benefit, too: they get access to an exciting new asset class--STOs--that will give them near-term liquidity and economic rights to the underlying assets of the business. 

Navigating New Waters

Currently, the most common approach to an STO is Regulation D 506(c), which allows you  to raise an unlimited amount of capital, generally solicit or market you deal, but restricts you to accepting only verified accredited investors. Regulation S, which allows you to accept international investors, is often used in parallel with Regulation D. 

As always, you should retain an experienced securities attorney to help you evaluate whether an STO is right for your business. At a minimum, you will need to devise a strategy for primary issuance (tokenization), legal, and liquidity. And while Coinbase is not the only digital currency exchange with plans to trade security tokens, they are an industry bellweather. 

Anthony "Pomp" Pompliano, Founder and Partner at Morgan Creek Digital Assets, is an outspoken advocate for security tokens, who can often (multiple times daily) be found on Twitter claiming that "the virus is spreading," to the tune of dozens of retweets. Pompliano says the acquisition of Keystone Capital is "another step in the process for Coinbase to be able to support tokenized securities trading. It's coming. No one can stop it." 

Established companies are already beginning to tokenize equity in their business, and startups now have a new vehicle that may provide faster and easier access to capital.

By the end of the year, Coinbase may be more profitable than Intercontinental Exchange, the parent company to the New York Stock Exchange. Richard Johnson, Senior Analyst of Market Structure and Technology at Greenwich Associates, sums it up nicely, and with a warning, to Wall Street: "Stocks are in danger, and security tokens are the invasive species."