The rationale behind the recent launches of security token platforms and protocols.
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### What is a “security token”?

**A security token represents an electronically wrapped stake or share in a private interest like a fund or company.** That could extend to various assets — real estate, trusts, any LLC, [art](http://fortune.com/2018/05/18/security-token-harbor-ceo/), precious metals, carbon credits, IP — the list goes on. These tokens are subject to [federal security regulations](https://medium.com/@apompliano/the-official-guide-to-tokenized-securities-44e8342bb24f) and [will be legally enforced as securities](https://venturebeat.com/2018/06/09/how-security-tokens-are-going-to-disrupt-venture-capital/), with rules around recovery and re-issuance that other crypto assets lack.

![](https://hackernoon.com/hn-images/1*NkdBWPNxcwqt9Pn0l1oRng.jpeg)

A few examples of [security](https://hackernoon.com/tagged/security) tokens already exist in the wild ([CityBlock Capital’s NYCQ $20mm tokenized investment fund](https://cityblockcapital.com/), [Blockchain Capital’s BCAP raise for it’s third fund](https://www.smithandcrown.com/sale/blockchain-capital/), [Pangea’s tokenized Brooklyn building](https://www.cnbc.com/2018/03/19/own-shares-of-brooklyn-building-with-tokens-blockchain-real-estate.html)). But the majority of assets are still far from tokenization, and asset holders are likely not interested in building infrastructure — exchange support, additional distribution, whitelisted users, audits — from the ground up.

Thus, security token platforms have sprung up to effectively offer tokenized assets **compliance-as-a-service.** These platforms force users to register and allow assets to determine localized requirements at issuance. Then, they regulate the secondary market —either directly or via a network of providers.

Leaders in the space include:

*   [Harbor](https://harbor.com/)
*   [Polymath](https://polymath.network/)
*   [TrustToken](https://www.trusttoken.com/)

For a deeper dive into the economics and tech of each, [read on here.](https://medium.com/@mondesai/security-tokens-the-players-efb936ae84df)

### Why do we need another token?

The market opportunity for these tokens is _massive_. [Global real estate value was recently estimated at $217 trillion](https://hackernoon.com/traditional-asset-tokenization-b8a59585a7e0). [Global](https://hackernoon.com/tagged/global) equities and debt were estimated at [$67 trillion and $99 trillion respectively](https://drive.google.com/file/d/180nPuOOPOZlDRDKSUoJP84AvFY0T5AuB/view) in 2016. For these assets and others, [issuance fees can range from 5% to 10% of the amount raised](https://drive.google.com/file/d/180nPuOOPOZlDRDKSUoJP84AvFY0T5AuB/view).

This method is **faster and cheaper than** the current ownership accounting model**,** removing the middleman’s fees and latency. With tokenized ownership, parties can trade and settle within minutes rather than days for equities and up to months for trusts, at a fraction of the cost. That **opens up new opportunities — like fractional ownership and a broader investor base.** That is partially because improved speed and cost leads to higher liquidity, potentially **closing a** [**20–30% “illiquidity discount”**](https://medium.com/harborhq/introducing-harbor-90ffc2b49a21) and curtailing resell risk.

**Fractional ownership changes the economics of owning pricy assets and decouples use from price exposure** — suddenly developers can slice up a building in a specific neighborhood and give everyday investors access to that appreciation. A liquid market around fractional units would mean homeowners could diversify their existing exposure, selling ownership in their property and buying stakes in an emerging area a few miles away. Since homes are often [people’s largest purchase,](https://blog.mint.com/goals/the-surprising-numbers-behind-buying-a-house-082011/) that type of diversification can provide meaningful downside protection.

Similarly, those investors could own a percentage of their favorite artist or musician’s rights. Extrapolating, that means [consumer activism](https://www.forbes.com/sites/peterhorst/2018/04/09/rise-of-consumer-activism-spells-new-risks-for-brands-heres-what-you-can-do-now/#12f381424659) could move beyond consumption and social media into the investment world — people could go long or short brands based on their views. And asset-originators / holders can bear less risk — [museums could continue to display their art while others own the rights to the asset’s appreciation.](https://blog.nomics.com/flippening/security-token-documentary/#part03)

> “You can go long French impressionists and short modern art. You can do the same with real estate — I tear off a 10% strip of all my Class A in Midtown and create a Midtown fund. Class A in Upper East Side, Downtown, Brooklyn, Jersey. I can go long Manhattan, I can go short Brooklyn.” — [Josh Stein](http://fortune.com/2018/05/18/security-token-harbor-ceo/), CEO of Harbor

Also, **assets become global.** An interested US investor could buy into a neighborhood of Bangkok while an aspiring Nigerian investor tries his hands at small cap US equities. That **opens up financial access to capital appreciation** greatly, a primary means of [wealth accumulation](https://www.theguardian.com/books/2014/apr/28/thomas-piketty-capital-surprise-bestseller). It also means new entrepreneurial asset advisors will arise, separate from large advisory firms.

### Who’s going to want this?

Which assets will choose to tokenize first? Most **hard assets would strictly benefit from increased liquidity** — art, real estate, diamonds. Assets that revolve around **licensing rights like music and IP may also benefit** from that initial liquidity with little downside from mark-to-market swings.

However, **private companies and investment funds might prefer to have illiquid capital** for a period of time, to access patient capital and advisers instead of the [“short-termism” public companies](https://www.wsj.com/articles/short-termism-is-harming-the-economy-1528336801) face. As we’ve seen, many startups have already realized that conundrum, [resisting the pressure of going public](https://www.bloomberg.com/view/articles/2018-03-14/late-stage-venture-capital-changes-the-purpose-of-ipos) at all costs.

_For more on how leaders in the space like_ [_Harbor_](https://harbor.com/)_,_ [_Polymath_](https://polymath.network/) _and_ [_TrustToken_](https://www.trusttoken.com/) _work and a dive into the implications of their varied business models,_ [_read on here_](https://medium.com/@mondesai/security-tokens-the-players-efb936ae84df)_._

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