The hype season for ICOs is dramatically declining after series of failures and problems happened in early 2018. It is at its lowest point since May 2017, as these projects failed to hit the $300 million fundraising mark last September 2018. Exchanges are now heading their investments for the possible issuing and trading of tokenized securities, as shown in the latest Diar Report.
Many people are now shifting on investing in security tokens — but what is it and why people are slowly moving into these kinds of tokens? Here are the 3 simple things that might help you understand what security tokens are and how it works:
A security, in a financial context, is a certificate or other financial instrument that has monetary value and can be traded. Securities are classified as either equity securities, such as stocks and debt securities, such as bonds and debentures.
In simpler terms, Security Tokens are cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders.
When you invest in a security token, you are actually investing in the underlying asset. The fact that there is a security token is somewhat irrelevant — it’s simply your digital proof of ownership in that security. Because security tokens are digital, they are more efficient than traditional methods.
Just to add, a correctly coded Security Token makes it virtually impossible for anyone to buy, sell, or trade the security in a non-compliant way. US Securities Exchange Commission (SEC) Chairman, Jay Clayton, recently stated, “Blockchain technology has incredible promise for securities and other industries.” Regulators have so far have been complimentary of blockchain technology and its potential.
They’re also tradable on global marketplaces, giving security tokens a level of liquidity that would be impossible with traditional securities which I will discuss further in the next part.
Liquidity represents one of the most important concept — aside from market capitalization — that everyone needs to understand when trading or investing cryptocurrencies. Liquidity is the degree to which a particular asset can be quickly bought or sold without affecting the general stability of its price. In simplest terms, liquidity refers to the ability of an asset to be converted to cash easily.
The promise of global liquidity is perhaps the security token’s most valuable trait. Security Tokens have the ability to represent fractional ownership of an asset and to be traded on global security token marketplaces and exchanges — two things that are virtually impossible for traditional securities.
For example, traditionally illiquid assets like real estate or fine-art can become liquid for stakeholders by issuing asset-backed security tokens that represent a stake in the underlying assets. And because the tokens can be listed on global markets, security can be made available to global investors that are eligible to buy, sell, and trade the security agreeably.
There is no need for any one party to trust the other when transacting via a security token. All transactions associated with a security token (issuance, buying, trading, etc.) are recorded on the blockchain, which is considered a “trustless” system due to the fact that blockchains are public and immutable in their record keeping.
We’ve already seen the tokenization of funds, companies, and real estate. With new security token exchanges and marketplaces coming online and a wide variety of tokens to be traded agreeably on a global scale, the opportunities for investors will be unlike anything is seen before in the asset-backed securities markets. Investors won’t be investing in “security tokens”, they will be investing in a class of asset that was never before available to them, like hot early stage businesses, exclusive real estate deals, and priceless fine-art. The security token just makes it all possible in a compliant and efficient way.
Is this worth the risk?
Compared to ICOs which offer no share of the underlying asset or project, STOs are backed by real assets — whether equity, investment funds, or debts/loans, etc — similar to more traditional securities. With this, they often attract contributions from investors who are looking for a good return with greater liquidity. Also, security tokens allow you to divide underlying assets into smaller units, thus, enabling fractional ownership.
Every coin has two sides, and even STOs have several disadvantages. Since this is a relatively new market, not many people know its intricate details. Compliance will surely be complex in order for a project to meet regulatory criteria and be more fraud-proof. Gaining traction will also be one of the challenges, but with the help of marketing professionals or STO Development agencies like Crowdcreate, this young bull will most likely change our perspective of trust in the near future.
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