Security tokens: the greatest financial revolution of our time

Part 1: Introduction to security tokens

Many in the blockchain space dream of Bitcoin replacing fiat and becoming the new global reserve currency.

Even if we achieve this ambitious vision, only a third of the world’s wealth is tied to cash. The rest is locked into other investment vehicles such real estate, commodities, stocks, etc.

How do we bring the rest of those assets to the blockchain?

That’s where security tokens come in, and they have the potential to bring trillions of dollars of capital onto the blockchain.

What is a security token?

A security is an investment vehicle that represents ownership in a company where there is an expectation of profit from the effort of others. Stocks, and mutual funds are examples of securities.

A security token represents ownership in that investment and lives on the blockchain.

According to Trevor Koverko from Polymath, security tokens represent ‘programmable ownership…it’s more secure, it’s more transparent, it’s more immutable than the current way things are done”

Most of the financial infrastructure is built on legacy systems from the 1980’s and are overdue for a 21st century update.

How do security tokens work?

At the most basic level, security tokens are programmed with KYC/AML protocols to ensure that only accredited or authorized investors are trading with each other.

KYC (Know your customer ): the process of verifying the identity of clients.

): the process of verifying the identity of clients. AML (Anti-money laundering) : the legal controls that require institutions to prevent, detect, and report money laundering activities.

: the legal controls that require institutions to prevent, detect, and report money laundering activities. Accredited Investor : Not everyone is allowed to invest in securities, and the laws vary from country to country. In the United States, an Accredited Investor is someone who either:

: Not everyone is allowed to invest in securities, and the laws vary from country to country. In the United States, an Accredited Investor is someone who either: 1. Has a net worth of at least $1 million (excluding their primary residence value)

2. Has earned an annual income of at least $200,000 in the last 2 years

Security tokens allow for features such as:

Capping the number of token holders : If a company wishes to stay under 2000 token holders (going over 2000 investors means they would need to disclose financial information to the public) that can be programmed and the number of token holders will be capped at 2000.

: If a company wishes to stay under 2000 token holders (going over 2000 investors means they would need to disclose financial information to the public) that can be programmed and the number of token holders will be capped at 2000. Following securities laws on secondary markets: For example, if you’re only allowed to bring on accredited investors from the US, the security token cannot to be transferred to investors in other countries (the transaction won’t go through)

Why use security tokens?

1) More liquidity: This is probably the greatest advantage of security tokens as most private securities are highly illiquid. Even if you’re able to find buyers you need approval from fund managers. That’s because the buyers need to match regulatory and contractual requirements. Security tokens help automate this compliance process, making it easier to trade on secondary markets.

2) 24/7 markets: Wall Street never sleeps (except between 4:00 p.m. and 9:30 a.m. EST and weekends). Security tokens are available for trading at any time on an online exchange.

3) Access to more investors: You’re not limited to your standard San Francisco or New York VC firms. You now have access to a global pool of capital (assuming he/she is an authorized investor of course)

4) Your funds are safer: Being your own bank is one of the benefits of cryptocurrency, but it can be a double-edged sword. If you are hacked and have your funds stolen there are few options for recourse. Since security token holders need to go through a KYC process and be whitelisted, even if you’re hacked the tokens can’t be sent to unauthorized/anonymous addresses.

Top security token platforms

Security token platform: These are companies providing the the legal frameworks, tools, and code to help companies tokenize their assets

Polymath : Provides companies with tools/modules for issuing their own security tokens (self serve model). They are expected to launch their first security token on August 2018 for CORL.

: Provides companies with tools/modules for issuing their own security tokens (self serve model). They are expected to launch their first security token on August 2018 for CORL. Harbor: Provides an end to end solution for companies wishing to tokenize their assets (high touch point service model)

Top security token exchanges

Security token exchange: These are markets where you can trade security tokens. They are built to comply with the security laws of their jurisdiction.