Security tokens are rising in popularity, and for good reason. This article will help you wrap your head around security tokens, their advantages and the growing market.
What is a Security Token?
A security token is the digitisation of traditional investments employing blockchain technology. Security token offerings (STO) onloads financial assets on a distributed ledger (Blockchain) which can then be traded and held. Examples being; Real estate, company equity, funds or even commodities like gold or silver. The world of tokenized assets derives value from the tangible world assets they represent.
Regulators such as the SEC in the U.S. are increasingly looking to distinguish between security tokens and traditional cryptos such as BTC and ETH. Regulators may class traditional cryptos as commodities in the future. Global securities regulations may apply to the compliance regimes of securities tokens going forward.
Think of security tokens as a bridge between traditional financial assets and the advantages of blockchain.
What advantages do Security Tokens have over traditional securities?
Expediting issuance of assets
Traditionally listed companies must go through a lengthy process to gain approval by regulatory bodies. Blockchain could accelerate this process with compliance ingrained in the protocol of smart contracts. This both reduces costs and time spent.
Regulation as securities also brings confidence within the crypto space, knowing that compliance is already embedded. Embedded compliance looms as a critical advantage of security tokens as risk assessment is auditable on chain. The assets are then held on a distributed blockchain ledger adding transparency to token holders as you can monitor on chain activity from transaction initiation to instant settlement.
Democratising access to investors
Traditionally, real estate and art are bought and held as a whole. Security tokens have an advantage in that they allow for fractional investing, enabling ownership by the masses and not a single entity, bringing more liquidity to the Security Token Market.
The Security Token Market: where is it headed?
The Security Token Market is still in a fledgling market cap state, sitting at only around $700Million. In 2016-18 the crypto space saw a major rise in Initial Coin Offerings (ICOs) launching. Yet with crypto down in 2018, many of those projects crashed and burned along with the funds invested. STOs are different from ICOs because they represent the established value rather than promises of potential crypto projects’ future successes and valuations. With over 9000 ICO crypto projects, STOs may prove successful given their tie ups with traditional financial assets.
What issues still hold Security Tokens from further adoption?
- Hyper regulation: Governments could go overboard with compliance demands. No one likes paperwork.
- Identity and confidentiality: open ledger pseudo-anonymity issues are still to be resolved. I.e. the choice between regulatory oversight to assess ownership vs investors inherent desire for financial privacy.
Cryptocurrencies like BTC may eat into traditional financial markets, STOs on the other hand combine conventional investments with the benefit of blockchain. Granting financial markets confidence to transition towards Security tokens. There’s room to grow with growing traction in standardising processes with the SEC and other global regulatory bodies.