The importance of the Security Token

Securities market and blockchain

Since the bitcoin launch and its growth in late 2017, its underlying technology blockchain attracted the same, or even more, attention than its most famous use case – bitcoin. At the same time, the revolutionary new way of peer-to-peer fundraising has shaped up the initial coin or token offering (ICO or ITO). The new blockchain ventures are funded by sale of the tokens that mostly transfer the ownership of % of functional utility or proprietary money supply. This type of token has many forms and names. Most commonly, it is called the utility token (transferring % of functional utility). It can also be called payment token (accepted by Swiss regulators) and security token. I saw a list with specified different token types; but in the end, they can be grouped in three categories or a combination of two or all three of them.

Security token can be in the form of the asset-backed token (equity, debt, real estate or some other form of asset) or expectation of profits (profit or revenue sharing model). The importance of the security token is not only in its regulatory clarified nature, but also in bringing closer the real world assets and digital tradable assets.** **

The latter is of incredible importance and I have not seen many articles about it. It literally links the blockchain industry and investment industry. This represents another important disruptive angle of the blockchain revolution. By using blockchain technology in the investment industry, global trading is finally being simplified; accounting and security are additionally automated and any fund embezzlement or manipulations by fund managers are cut short. Yes, I am aware of custodial issues; but I also have not heard of many upcoming solutions. So for now, it is all roses but the market is moving ahead.

Due to the entrance of the security token to the scene, and with further clarification of its regulatory adoption, we shall be able to see numerous examples of blockchain projects in the investment industry, such as:

  • traditional tangible assets tokenization,
  • fund management automation,
  • private equity funds shifting to blockchain technology,
  • trading of the tokenized collectibles,
  • real-estate, land registries, and its derivatives tokenized, traded and fractionalized,
  • crowd-investing moving to blockchain technology, and enabling of the secondary markets for security tokens deriving in crowd-investing ecosystems, and many more.

If we take a closer look at the capital markets industry and its processes, we can see how transformative the pure existence of the security token is for this industry. Currently, the issuance of the securities is a critical path within the capital markets for either debt or equity. The issuance is in need of creation, management, and distribution of physical documents, filing of various requests for approvals or negative rulings. At the same time, the management of the post-issuance traded on the exchanges is equally cumbersome. I found data in an article stating that blockchain can save globally between US$ 20 billion and US$ 100 billion per annum of only post-trading costs, and approximately US$ 10 billion for issuance and regulatory costs. I cannot confirm these numbers, but even taken with a pinch of salt, the savings would be enormous. The challenges like manual processes, intermediaries, limited audit trail, high settlement risk, long clearing and settlement cycle etc. can be resolved by simple usage of blockchain. It would enable the secure transactions, but also direct dealing between issuer, syndicate members and investment bank or investor while it provides the real-time ownership of underlying security. The times of long settlement days between countries are long gone.

The security token is bravely treading where securities have not tread yet. It is showing that all this is possible and it will, in the end, disrupt the multi-trillion dollar investment industry in the near future. In my humble opinion, this is the major importance of the mere existence of the security token.

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