Popularity of Security Tokens is on the Rise

The popularity of security tokens is on the rise.  They represent the next step in blockchain investing.  Here we will briefly discuss the basics of what they are, what they offer, and where they can be found.

What is a security token?

A security token is a unique digital asset which represents an investment contract between its holder, and the issuer of said token.

As investors purchase these tokens from a ‘common enterprise’, with the hope and anticipation of future growth on their investment, they fall under current regulatory definitions of a security.  By falling under this heading, these tokens are subject to high levels of regulatory scrutiny.

  • Accredited investors only
  • Know your Customer (KYC) & Anti-Money Laundering (AML) checks
  • Regular financial reports divulged to share/token holders

Quite simply, a security token is the next generation of traditional shares within a company.

How do they differ from Utility Tokens?

2017 saw a meteoric rise in the popularity of utility tokens.  While utility tokens can provide companies with fantastic functionality when applied correctly, they are often misused.  Unfortunately, many investors confuse utility tokens with security tokens.  There are a couple of key points that differentiate these two types of tokens.

  • Security tokens represent fractionalized ownership of an asset, rather than simply services owed.
  • Whether it is an investment fund, the company itself, or physical items, security tokens are asset backed.
  • Utility tokens do not represent ownership of anything. They are akin to an ‘in-store coupon’.

What benefits do they offer?

Now that we have differentiated security tokens from utility tokens on a very basic level, how do they differ from traditional forms of investment?  Why distribute a digital token at all?

The perks are various, and benefit not only investors, but token issuers as well.

  • Liquidity
    • Traditionally, investing in a security requires that the investment remain locked-up for a long duration of time. By issuing securities as a token, they will be tradable on secondary markets typically after no longer than 1 year.  Markets change, investor insight changes, and financial climates vary.  By gaining the ability to exit from their investments after a short period, investor’s funds are more liquid and flexible.
  • Transparency
    • Due to the regulatory oversight, and fiscal responsibility on behalf of the token issuer, these investments are very transparent. Owners of a utility token have no right to be privy to a company’s financial situation.  As security tokens represent an investment contract, holders are entitled to regular financial breakdowns of the issuing company.  They are allowed to be privy to company spending, asset holdings etc.
  • Democratization and Greater Access
    • Traditionally, fundraising can be quite restrictive. Venture capital funds are often very restrictive on their lending terms, making the process difficult for early stage start-ups.  In addition to this, many smaller investors find themselves limited to their investment opportunities, as good opportunities are restricted to large investments.
      • Security tokens democratize investing, as they allow for a much broader scope of investors to take part. In doing so they also allow start-ups access to greater markets.

What platforms facilitate tokenization?

All of this sounds great.  Issuer accountability, greater opportunities, investment flexibility and more.  Until recently security tokens haven’t found a home.  Unlike utility tokens, which are actively traded on just about every cryptocurrency exchange, security tokens are not.  This is changing, however.  With their rapidly growing popularity, in recent months we have seen the rise of various exchanges and platforms dedicated specifically towards this token class.  Below are a few of those leading the charge in furthering the accessibility of security tokens.

  • Polymath
  • Securitize
  • OpenFinance network
  • Harbor

Industry acceptance of securities?

Aside from specialty platforms, industry stalwarts have expressed their interest in security tokens.  Often viewed as the face of crypto, Coinbase has stated that in the coming years they anticipate that they will support thousands of security tokens on their platform.

They believe that everything will one day be tokenized.  Whether it is a piece of art, a company, or a fund, fractionalized ownership will be common place.

Market Sentiment

It is obvious that market sentiment is changing.  Those that follow blockchain have witnessed utility tokens go from the darling of the industry, to being riddled with scams and thefts.  Due to a lack of regulatory oversight, billions have been lost and stolen in a short period of time.

This has not deterred investors, though.  While utility tokens might not be the answer that many were looking for, security tokens may be just that.

To learn more about Security tokens, visit the website.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.