Uzbekistan cash.
The country’s new Digital Trust fund is studying raising funds via security token offerings.

The former Soviet state of Uzbekistan, finally under new leadership after decades of Islam Karimov running the show, has discovered cryptocurrency at a time when no one seems to want it. No, they are not launching a cryptocurrency like Venezuela’s Petro coin or the breakaway province of Abkhazia’s coin plans over in the nation of Georgia. New president Shavkat Mirziyoyev says crypto is legitimate tender, at least for cryptocurrency traders. He legalized exchanges in the Central Asian nation in September and created a fund that same month to invest in blockchain-related startups and research and development called Digital Trust. Other than being an investment vehicle for new technology, Digital Trust is stepping on the crypto bandwagon in trying to bring security token offerings (STO) to a country few in the crypto world have even heard of.

Uzbekistan may not be on anybody’s radar, but its foray into STOs are another testament to crypto being akin to a potential godsend for raising capital in emerging and frontier nations like Uzbekistan. “We are looking very carefully at STO and just starting to build the framework for it,” says Bobir Akilkhanov, investment director at Digital Trust. “We understand that ICOs were a hype tool for investors, with no assets to back up those coins. STOs are more of a legitimate investment because you can tokenize your assets. We are working on the laws to build the market. We don’t want to hurry through it and make all these mistakes and have something that is not useful.”Uzbekistan’s President Shavkat Mirziyoyev launched a blockchain fund in September, two years into his presidency. Crypto exchanges and trading is legal in Uzbekistan. (AP Photo/Alexander Zemlianichenko) photo credit: ASSOCIATED PRESS

He did not disclose the funds assets under management. And they have no STOs or cryptocurrencies in the portfolio. Right now, this is just Uzbekistan testing the blockchain waters, which is separate from the muddy crypto waters, of course. Neighboring country Kazakhstan is doing the same with blockchain so as not to miss anything. One of their core holdings in the fund is Delta City, a large scale real estate project in Tashkent with all the smart-city bells and whistles … and no tokens.

Uzbekistan traditionally attracts investors from South Korea, China and Russia. For crypto and blockchain, the ones showing interest are from China, Hong Kong, Japan, South Korea and Singapore. STOs are sort of like the grown-up, Wall Street-ish version of the initial coin offering, the cryptocurrency market that ushered in the euphoria for crypto between 2016 and 2017 until that bubble burst in 2018. Coindesk, one of the premier publishers of crypto/blockchain news, hasn’t published a story about an ICO since December 5, and before that ... November 14. If cryptocurrency investing is ever to professionalize, it needs traditional investors, and traditional investors seem to prefer the STO.

Digital Trust says it ideally wants to see if they can raise money for Uzbekistan assets in STO offerings, either belonging to private or public companies. The fund is currently looking to establish partnerships with leading blockchain service providers where they can test drive a homegrown STO market.Workers operate sewing machines at the Platinum Moynaq Cotton Cleaning Factory in Uzbekistan in March 2018. Proponents of cryptocurrency say that poor countries will have an easier time raising money from foreign investors via cryptocurrency. Photographer: Taylor Weidman/Bloomberg photo credit: © 2018 Bloomberg Finance LP© 2018 Bloomberg Finance LP

“Companies can raise money the old-fashioned way too, through bond offerings. But STOs are an interesting avenue because it makes some of your state assets more readily accessible to foreign investors,” says Igor Khmel, CEO and founder of BankEx in New York, a fintech company providing STO services. “For the same reason you are using a smartphone instead of a rotary phone, STOs are faster, cheaper and more efficient because of the blockchain-based securitization of assets. They are easier than an initial public offering, easier than venture funding and more accessible than the bond market."

Some are suggesting that STOs could help $1 trillion of assets migrate onto various blockchain platforms before the end of the decade. Like the dying ICO market, STOs have true believers. “If it plays out the way I think ... it is likely to be the greatest investment opportunity humanity has seen in this era,” CEO of Polychain Capital in San Francisco, said during a panel discussion at the Web3 Summit in Berlin in October.Olaf Carlson-Wee, founder and chief executive officer of Polychain Capital. STOs are “the greatest investment opportunity” in crypto. Photographer: David Paul Morris/Bloomberg photo credit: © 2017 Bloomberg Finance LP© 2017 Bloomberg Finance LP

According to a report in Longhash, a blockchain news and information portal with offices in Shanghai and Hong Kong, OpenFinance Network and tZERO are STO-focused exchanges set to offer a flood of listings in 2019. Coinbase recently acquired a broker-dealer license and an alternative trading system license, along with a registered investment advisor license, out of the expectation that cryptocurrency investing and fundraising is far from dead. Binance plans to launch an STO trading platform with the Malta Stock Exchange. And in Uzbekistan, BankEx is the early entrant in an otherwise tiny crypto market. Digital Trust brought them there.

“The main thing about these markets is you have to have open networks, which makes it kind of borderless, so it doesn’t matter where you are anyway,” says Diego Gutierrez Zaldivar, founder of RSK Labs in Argentina and a well-known bitcoin guru throughout Latin America. “Blockchain is just the combustion engine to all these things related to cryptocurrency, but you need the full car. You need an internet of value for all of these investment plans to come to fruition,” he says, adding that countries where economies are volatile are more apt to see crypto thrive over time, so long as the infrastructure exists to make it happen.

The Uzbek currency, the som, is relatively stable. It was allowed to free-float under the new government and lost over half of its value in the process. But since September 2017, it’s been relatively steady between 8,000 and 8,300 to the dollar. Their GDP growth rate has been over 5% since 2004, according to the World Bank. It’s poorer than India, with a GDP per capita of less than $1,600. It would take the average Uzbek a year to buy half a Bitcoin.

“Our goal is to starting our STO platform in niche markets, or niche regions like Uzbekistan,” says Khmel. BankEx is also present in the crypto havens of South Korea and Japan. They are moving into Thailand mainly for digital-asset custody. “Uzbekistan is different. We will be doing STOs there. The government wants to become a blockchain-centric government,” he says. “Each country has something unique to offer, I think. They can become one of the main markets in the region for companies considering STOs. We are taking the first steps with them to make it happen.”

Article Produced By
Kenneth Rapoza

Senior Contributor