Are STO’s The Future?

By Aly Madhavji on ALTCOIN MAGAZINE

The hot topic right now is Security Tokens. Everyone keeps asking if security tokens will revolutionize the world of finance? The answer is yes, as inevitably technology will win. However, it will take time and it will be a long and bumpy road.

What Is The Main Difference Between A Utility Token And A Security Token?

Now, the majority of utility tokens only need to follow legislation in the country where they are issued. Security tokens, however, face much more complexity. They must follow legislation in each jurisdiction they intend to raise capital and their issuing country This will generally limit access to accredited investors.

How Will This Impact Accredited And Non-Accredited Investors?

Although secondary trading would be open to accredited investors, non-accredited investors will likely need to navigate a variety of jurisdictional nuance. Moreover, even accredited investors may be subject to an initial ‘holding period.

What Are The Main Securities Categories For Tokenization?

1. Company Securitization

2. Asset (short-term or long-term) Securitization

3. Debt Securitization

How Could These Be Securitized in Practice?

Company securitization would include equity (as a share class, or common, or preferred stock), revenue, profit, and dividends from retained earnings. Short-term asset securitization would include short-term investments, accounts receivable, prepaid expenses, short-term futures, and inventory. Long-term asset securitization would include futures, physical property, plant, and equipment including real estate, machinery, vehicles, etc. Debt securitization would include securitizing corporate debt, government bonds, and debentures, and other debt instruments.

What Are Some Of The Major Benefits With Security Tokens?

A unique intrinsic benefit of security tokens is their fundraising economies-of-scale. As more entities launch security tokens in a particular jurisdiction, the reporting, administration, and legal processes become more streamlined. Fractional ownership of a company, asset, or debt securitization, can increase the accessibility of these products to a much larger group of investors, who would benefit from increased diversification. Additional benefits include: increased liquidity and accessibility through new security token exchanges; potential to eliminate brokers, leading to reduced trading costs; and initially a higher security token valuation is given the attractiveness of this new frontier-based fundraising mechanism. In terms of externalities, wide-adoption of security tokens could lead to increased transparency and traceability which could in turn combat issues such as insider trading.

What Are Some Of The Major Challenges Facing Security Tokens?

Challenges facing security tokens can be categorized in one of three ways: people challenges, market challenges, and process challenges. In terms of people, there is a shortage of leadership within the securities exchange space, which needs a reputable first movers to establish credibility and fuel growth in different jurisdictions. From a market perspective, there is poor or no liquidity on existing exchanges given the lack of reporting, due diligence, and audits on these instruments. There are also unjustifiably inflated security token valuations. Finally, from a process perspective, it is complex and expensive to launch and fundraise for security tokens.

What Are Some Potential Major Developments To Look For In 2019?

There are already promising signs that security token protocols and exchanges will undergo major developments during 2019. The JOBS Act crowdfunding legislation in the United States, in particular, could be one of the catalysts for the growth of security tokens. This would allow non-accredited investors would be able to invest in security tokens up to a threshold. If investors take advantage of this moment, the market could realize many of the benefits previously detailed.

References:

This is a repost of the Article written by Aly Madhavji featured in the Crypto Investment Times Magazine for the December 2018 edition: http://cryptoinvestmenttimes.com/CIT18/The-Crypto-Investment-Times-Dec-2018.pdf