One of the main purposes of cryptocurrencies is to disrupt the traditional finance industry.
Proponents picture an environment where the traditional banks and financial institutions will be completely replaced by the decentralized cryptocurrencies and digital tokens.
However, there is an entirely different group of crypto that has until recently being overlooked.
A class of cryptocurrency that can transform not only the traditional financial system but also the way we view physical ownership of numerous assets. From shares to commodities and property, security tokens could be one of the most transformative applications of digital assets yet.
In this piece, we will take a look at security tokens and how they can transform the way we think about asset ownership.
What is a Security Token?
A security token is an asset that has been securitized and then tokenized. In other words, security tokens are immutable digital records of ownership to some underlying asset.
They are different from their utility token counterparts in that they are not developed to be used in an ecosystem. They are developed for investment purposes so that the holder can partake in the future fortunes of an underlying asset.
The opportunities for tokenization are quite extensive.
For example, all forms of traditional securities such as shares, bonds, commodities etc. can be tokenized. You could also tokenize other assets such as real estate and even venture capital funds.
.Essentially, you can think of security tokens as some sort of a “bridge” between assets that already exist in the physical world to the blockchain world. It takes the record of ownership of a physical asset and uses blockchain technology to secure it in a digital form across a large decentralised network.
Benefits of Security Tokens
There are a number of benefits to using a security token over traditional financial assets.
Firstly, there is the ease with which these assets can be traded. Digital tokens can be traded 24 hours a day, 7 days a week and 365 days a year. The market is also truly global and you can trade your tokenized share of ownership with anyone around the world.
Once you have determined that you would like to sell your security token, settlement is instantaneous. Ownership records are changed immediately on the blockchain. For example, there is no need to wait t+2 or t+3 days.
Moreover, because the market is so large and expansive, it opens up so many funding opportunities for those companies that are raising financing. They merely need to tokenize their shares and then make their pitch to the global community.
No need to localize the offering to those investors in the USA when you can make your case to potential investors in Asia and Europe. No need for the various middlemen and lawyers that invariably inflate costs.
Security tokens also democratize the investing process.
Instead of all of the “professional investors” who get access to the best deals coming out of Wall Street, security tokens will allow the average individual to partake even if it is only with small levels of investment.
Moreover, security tokens have the benefit of being regulated. Given that they are by definition securities, It means that the SEC will have jurisdiction over them. This means that they will appear much more legitimate than all of the current ICO offerings that are selling unregistered securities.
Security Token Projects
There are a whole host of projects that are currently working on security token offerings. However, two of the most notable are Polymath and tZero.
Polymath is an interesting project that is developing a platform that will allow other companies to tokenize their assets on. You can think of it as a security token version of Ethereum.
In fact, they have even developed their own token standard called the ST20 standard. The Polymath platform has security token templates that companies will use when they begin the process of issuing their ST20 tokens.
Polymath will then use smart contracts, legal delegates, and other service providers to make sure that your security token application is up to the right standards. These are required in order to make sure the adequate KYC is done prior to issue.
The Polymath network has its own ERC20 utility token that will be used in order to pay for the resources in their ecosystem. These POLY tokens were released in an airdrop last year and they can be purchased on Binance. You can read a longer review of that exchange here.
tZero is a blockchain subsidiary of Overstock Inc. They have also developed their own version of the security token offering (STO). They have just completed a $134m Initial Coin Offering that has been ongoing since December of 2017.
They are regulated by the SEC as an Alternative Trading System (ATS) that will act as the exchange for the listings of these various security tokens. tZero will also provide a modular adaptable platform for the issuance of securities that are regulated by the SEC.
While there are many cryptocurrency projects that are worried about the prospect of a “security” classification and the scrutiny that comes with it, there are others that are actively embracing it.
Tokenized securities really do have the potential to change the financial ecosystem. They have the potential to connect companies, start-ups and other asset originators to an entire global community of investors.
Moreover, given that securities tokens will be regulated by the SEC, they have a strong legal backing and legitimacy that is not present in the rest of the ICO space. This legitimacy could open up the flood gates to a whole host of institutional money that has so far been avoiding the space.
Therefore, mass adoption may be closer than you think and securities tokens could be the gateway to it all.
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Nic is an ex Investment Banker and founder of the Coin Bureau. He has worked on numerous online businesses and is passionate about cryptocurrencies and decentralised technology. You will either find him a behind a collection of screens while trading Bitcoin, or in the basement maintaining his mining rigs.