There is a lot of talk about whether security tokens are the securities of tomorrow. For some, the answer is a resounding yes. Let’s take a closer look at what makes these tokens tick.
In general, security tokens can be offered (through security token offerings-STO) and existing assets can be tokenized in a way that ensures that they qualify as transferable securities. Of course, the widespread use of the technology is dependent on interoperability between ledgers, settlement for payments via DLT, and the legal framework in relation to AML/KYC, custody, safekeeping and redefining security paradigms as well. So far, there are three main archetypes of crypto-assets or tokens; namely payment/exchange tokens, security tokens and utility tokens.
In terms of payment/exchange tokens, ICO (Initial Coin Offerings) which are also called ‘token sales’ were launched to create a crypto-payment instrument. Of course, the value of these tokens solely depends on the value that users place in them. Interestingly, in terms of utility tokens, ICOs can also be used to sell tokens that provide investors with a functional advantage other than the ability to pay for external goods or services. Some of these utility tokens can be redeemed in exchange for access to a specific product or function provided by the token issuer. Lastly, but certainly not the least, we have security tokens issued via an ICO which are quite similar to financial instruments. In most cases, these security tokens are like depository receipts akin to the digital representation of existing securities such as equities, debt instruments, funds, etc.
Compared to payment tokens and utility tokens, STOs provide benefits for investors thanks to a superior asset universe, enhanced liquidity (trade/post-trade) and fractional ownership opportunities. STOs can be used to tokenize traditional assets such as property, paintings, antiques, cars, digital artwork, IP, songs, etc. Of course, investors can buy big ticket items in small percentages as well, that’s the beauty of this method. Recently, token fundraising peaked in 2018 at USD$11.4 billion and the bubble burst in 2019 with a total raise of only USD$4.7 billion. As of now, Singapore is the 3rd largest token raising jurisdiction after the US and
Switzerland at USD$1.2 billion. As tokenization mature, regulations will be more prevalent globally.
The recent SC guidelines on digital assets have defined the process of issuance of digital tokens, and these tokens have been defined as a type of securities under the Capital Markets and Services Order of 2019. Recently, MetalStream Ltd.’s launch of security tokens in Labuan that are backed by stocks of gold bullions at a 30% discount to investors just shows how things are progressing in the STO front. Even companies like Coinbase are pushing the “Bitcoin as digital gold” narrative. If one looks back to 1971 when the gold standard was broken, the dollar’s value has declined and gold’s value, in dollar terms has risen over 4000%. Bitcoin has been designed to be scarce like gold, and Coinbase is adamant that “bitcoin is a store of value to rival gold in the digital age.” In short, with the current uncertain economic trade winds that are blowing over us, the drive for safe havens such as gold and bitcoin will continue to accelerate. So, it’s perhaps time for us to look at security tokens and crypto-currency through rose-tinted glasses and embrace them for the change that is upon us.
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