Security Tokens in a Global Economy
Blockchain Security Tokens could Kick Start Global Economies with TAX incentives like Section 12J in South Africa
27/04/2020
Introduction
Section 12J South African Revenue Services (SARS) introduced S12J in 2009 as a TAX Break incentive for 100% deduction of the value of the investment in a South African registered Venture Capital Companies (VCC).
This is quite appealing if you are looking to reduce your TAX, with attractive returns by investing in (VCC’s) which includes Mining operations, access to Equity finance, Bonds and Real Estate, driving portfolios in new efficient and cost-effective ways.
On top of this by introducing a smart contract of Value on the Ethereum Blockchain, a further set of efficiencies to drive this incentive was created. The Flyt Property “Hospitality Fund” caters for Investors, with a new outlook on traditional investment vehicles offering a Blockchain (DLT) on-boarding threw the Ethereum Blockchain, siting
“In short, issuing FLYT is less expensive and more reliable than the alternatives, allowing the fund to deliver a better investor experience.”
Securities and Security Tokens | The Next Level
Both Cryptocurrency and (Tokens with the implementation of ICO’s) have had a great amount of scrutiny amidst regulation, accountability, and security. Security Tokens issued on Blockchain Technology, however, has become a representation or extension of Traditional Securities, offering the same due diligence, but in a new advanced technological way.
STO vs ICO Courtesy https://101blockchains.com/blockchain-infographics/
Security Tokens
1) Security Tokens offer a regulated bridge between traditional securities and Blockchain Technology as it is essentially the same but now formulated in a next-level equivalent, facilitating the Distributed Ledger Technology (DLT), Blockchain.
2) Traditional transactions follow a middleman or 3d party route. Blockchain Technology cuts out the costs of these mundane functions by reducing the complexity of the different intermediate functions, tedious paper trails, and unnecessary labor costs by the use of smart contracts.
3) Smart Contracts as a tool on Blockchain Technology provide for automated service functions through software integration. Currently, service providing functions are performed by Legal Associates, which add to the costs and time factor.
4) Reducing these lengthy traditional processes allows for faster execution and issuance of Security Tokens. Speeding up this process becomes a far more attractive investment prospect from the start.
5) Reducing middlemen and 3d party involvement also reduces the chances of corruption and manipulation.
6) Security Tokens become borderless Global Financial vehicles where investors have open exposure to free-market asset valuation and a much larger OTC or P2P investor base than current, localized silo institutions.
7) Secondary trading of Security Tokens will become easier as Security Tokens become available on Regulated Centralized and Decentralized trading platforms making it far easier and faster to Liquidate.
VCC Investors Courtesy https://101blockchains.com/blockchain-infographics/
The Value Proposition of Blockchain-Based Equity Fundraising
The secondary market for the S12J VCC with Security Tokens excels the value proposition of the TAX incentive with increased speed and automation with a Regulated Digital Security Asset to prompt swift Liquid transactions with ease. The advantages for ordinary Consumers, Corporates, and Banks in their own right, to optimize international transfers with higher efficiency, lower transaction costs, and 24/7x365. Compliance will be automated and built into the smart contracts of the Tokenized Securities, increasing the levels of Cross Border Trading opportunities.
Security Tokens brings about a new era of raising capital through “Tokenized” or Digital Shares on the same legislative level as the Traditional models. Increased design scope and first-mover issuance companies recommend that tokenized securities emulate old-fashioned securities, i.e., precisely duplicate the properties of shares or bonds. This makes it easier for the national securities authorities to recognize and approve (or deny) the security, and it makes it easier for investors to understand the security.
As technology advances, it will become extremely easy for issuers to design entirely new types of securities with properties like:
§ Rights allocation between the company and its founders and investors.
§ Royalties and Licensing contracts, or even Non-security related rights, such as a discount when shopping in company stores, free tickets to sports events.
§ In addition, the focus could be designing new types of derivatives, combining properties of shares and bonds, or combining other tokenized securities and assets opening up Global business opportunities for issuers and investors.
STO Stock, Equity, Bonds
It is worth singling out Mining operations like GOLD and Real Estate to Boost Economy and Growth.
GOLD Digitized as Securities will offer far superior services as a highly precious commodity. Enhanced accuracy, speed, and transparency will allow GOLD Mining operations to directly impact scaled operations and intern Global GDP.
SME’s in the mining sector in South Africa comprise of 40% of the Minerals Council and across sectors in Gold, Platinum, Coal, Iron, Chrome, and other base metals making it imperative to find advanced Financial Solutions to sustain current economic downturn and future advancements.
Real Estate holds $228 trillion in total assets Globally. The real estate market shares the value proposition of the overall securities market. One of the biggest benefits to Real Estate Tokenization is the ability to reduce ticket sizes by several orders of magnitude (e.g. EUR 100,000 to EUR 1,000). Real Estate is typically a share in the company owning and administrating the property, but it can also be a tokenized loan, profit-sharing right, and or dividend-distribution right.
Both will follow Legal and Technical processes including:
Jurisdiction, SPV, Prospectus, Design, KYC mythology, Legal Admin
Automation of Contract Workflow, Payment Solutions, Banking integration and Custody Options with access to Marketing for STO’s
How does Blockchain Work Courtesy https://101blockchains.com/blockchain-infographics/
The Underlying Blockchain Technology
The fundamental difference here is the Blockchain (DLT) itself. Blockchain Software is a trust engine with a shared, immutable, and transparent ledgers. The Blockchain Networks become the Trust Value and Transparency the Added Value. The trading history is visible for anyone, including authorities, the risk of errors is reduced, and discovering errors is increased.
In the current systems, if a company incorrectly update the cap table and their shares are uncertificated, investors risk losing their shares. With a Blockchain-based Tokenized Security, this can never happen, since the holder of the Token will also by definition be the owner, by Blockchain Certification.
Smart Contracts add a great amount of value to the automation of the processes with compliance features built into the software bringing down costs due to automatically maintained cap tables. These are periodically updated by scanning the Blockchain (DLT) for unreported trades, therefore an improved accurate cap table, allowing for increased transparency and decision-making effectiveness.
(ROI)
Blockchain benefits of increased efficiency, reduced trading and settlement times, reduced transaction fees, automation of compliance, increased cross-jurisdictional trading, increased liquidity of traditional illiquid investments, increased security, and reliability speaks for itself.
Current weaknesses in Security Tokens
Risk factors need to be weighed in by Individual or Financial Institutions, As individuals will be taking on far bigger risk/reward, with their P2P approach, the Brokerages have long-standing responsibilities through legislative laws and compliance regulation, for their services in underwriting, marketing, solicitation, and insurance investors interests.
SaaS/BaaS integration is a key factor just as Individuals and Financial Institution's integration are vital for the success of streamlined investment portfolios.
In Conclusion
Traditional Securities as capital investment is naturally drawn to Security Tokens because of the strict regulations they prescribe to in their digital format. Security Tokens can directly impact on Equity and Debt economics offering the owners, liquid and swift proceeds. In this Blockchain format, any type of ownership can be tokenized, this opens the doors to a Global Market Capitalization of close to $100 Tn.
Security Tokens offer us:
Increased efficiencies to digitize and automate processes related to Issuance, Transfers, Trading, Liquidity, and Larger Market Cap.
Blockchain Ledgers add the ability to use decimal fractions, enabling smaller sized Securities, but larger sized investor groups. Targeting a larger pool of International investors also becomes easier with less risk.
“The tokenization space is under swift development. Many technology providers have received big investments and the market has recently been predicted to reach $1.5 trillion in 2024 and this is just for Europe!”
https://dailyhodl.com/2020/03/05/tokenization-in-europe-market-size-to-reach-1-5-trillion-in-2024/).
“The security token market size has been predicted to grow with 59% CAGR until 2030”
Personal Disclaimer: My company Business2Blockchain Pty Ltd. facilitates Security Token Implementation. For any further information [email protected]
E-CERTIFICATE IMAGES Courtesy of Andrei Lipkin
Infographics: 101 Blockchain
Glossary:
Traditional Securities can be categorized into 3 sectors:
Equities, Debts, Hybrid (a combination of both)
Debt securities, which include government and corporate bonds, certificates of deposit (CDs), and collateralized securities.
Securities generally entitle their holder to the regular payment of interest and repayment of principal (regardless of the issuer’s performance). It is essentially fixed-income security.
Governments have a direct interest in Securities, in raising money to revive its economy. It uses bonds or debt security to raise that amount, promising regular payments to holders of the coupon.
Securities subject in South African Regulation
Curtesy: Lexology
“The relevant statutes governing securities offerings and trading are the Companies Act 2008 (the Companies Act), the Collective Investment Schemes Control Act 2002 (CISCA), the Financial Advisory and Intermediary Services Act 2002 (the FAIS Act), the Banks Act 1990 (the Banks Act) and the Financial Markets Act 2012 (the Financial Markets Act). This legislation applies to listed and unlisted securities.
Regulations
Historically, there has been one licensed exchange in South Africa, the Johannesburg Stock Exchange (JSE), for the listing of equity and debt securities, although recent developments have seen four new exchanges, ZAR X, 4 Africa Exchange, A2X and the Equity Express Securities Exchange, being licensed by the South African Financial Sector Conduct Authority (FSCA) (previously, the Financial Services Board). The JSE has two primary boards: the mainboard and an alternative exchange (AltX) for small and medium-sized companies.”
Cryptocurrency vs Token
A Cryptocurrency like Bitcoin or Ethereum is independent of its platform, which means they can be used outside of their environment in transactions.
Tokens are usually built on native Blockchains like Bitcoin or Ethereum as a vehicle or utility for companies to issue ICO’s or have an internal form of the transaction value.
Security Tokens
In a traditional sense, securities can represent an ownership position in a publicly traded corporation, a creditor relationship with a governmental body/corporation, or rights to ownership as represented by an option. A security token is a tokenized, digital form of these traditional securities.
References:
SARS S12J/VCC
South African Alternative Investments
Repository of STO’s