Takeaways:
- A security token is a unique token issued on the blockchain representing a stake in an external asset (stocks, bonds, funds, and other financial securities).
- Security tokens ensure the same investor protection and serve the same function as conventional securities with the added advantage of confirming ownership digitally using blockchain transactions and enabling fractional ownership.
- Tokenisation permits 24/7 trade with improved efficiency, without the need for intermediaries. Unlike traditional stocks, investors can have ownership of assets they invested in by storing the security tokens in their own digital wallets.
To understand security token offerings, we first must understand what a security token is. A security token is a unique token issued on the blockchain representing a stake in an external asset (stocks, bonds, funds, and other financial securities).
Entities like governments and businesses wishing to distribute shares to investors can use a security token that offers the same benefits one would expect from traditional securities like shares, voting rights, and dividends. Since the technology that underpins security tokens is blockchain, the advantages are numerous.
Advantages of a security token:
Transparency
One of the greatest benefits of blockchain technology, everything is auditable. Ledgers can be viewed to track holdings by everyone who has access to the blockchain.
Instantaneous
The process of clearance and settlement is a cause of concern for investors looking to transfer assets. While trades on a central exchange are quick, ownership reassignment can take time. On a public ledger, the process is automated and swift.
Convenience
Existing financial marketplaces typically run during business hours (for a fixed period during the day). However, a marketplace that runs on the blockchain network is active all the time, irrespective of the time of day.
Fractionalisation
Asset tokenisation is the process of converting ownership rights in a particular asset into a digital token on a blockchain. For example, a building in downtown Hong Kong could be worth $US 100 million, but this could be tokenised into 100 pieces such that each ‘token’ is worth $US 1 million. Tokenisation will democratise access to assets and offer superior levels of accessibility and granularity.
Increase in liquidity
Security tokens can increase liquidity in the market, partly due to fractionalisation and partly due to the ease of buying and selling in a market which is accessible round the clock.
What is a security token offering?
An STO (Security Token Offering) combines transparency and auditability, which are inevitable in financial transactions. They are compliant with related laws and rules, they create additional legal obligations for issuing equities in the company.
Tokenisation permits 24/7 trade with improved efficiency, without the need for intermediaries. Unlike traditional stocks, investors can have ownership of assets they invested in by storing the security tokens in their own digital wallets.
Types of security tokens
Equity Tokens
Equity tokens are like stock, except for ownership and transfer. Instead of tracking shares in a central database, equity tokens are recorded on a ledger by networked computers worldwide.
Debt Tokens
Debt tokens represent short term loans given to a firm for interest. Within the digital contract, repayment terms are included, dictating the dividend model and risk factors of the underlying debt.
Asset-Backed Tokens
Asset-backed tokens represent ownership of assets, such as real estate, art, or commodities. Blockchain enables a trusted record of transactions; it reduces fraud and improves settlement time.
Regulation And Digital Securities
Securities are, by definition, regulated assets and this increasingly includes digital securities. The Monetary Authority of Singapore, for example, clarified that it will regulate such products in 2017. This offers investors both legal and regulatory clarity as well as assurance that they are dealing in legitimate financial products.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.
