What Led To This Story?

This article started as a detailed response to a question about the ‘why’ behind sub-division and security tokens, but it quickly turned into an article-worthy length and figured it could be helpful for others to give this perspective a look.

This article is an interesting topic too considering CryptoKitties recently initiated a custom line of CryptoKitties with Steph Curry — sports and CryptoCollectibles…what has this world come to? Let’s find out!

In Lou Kerner’s ‘Prepare Yourself! The Security Token Tsunami Is About To Hit,’ he uses an example about the Green Bay Packers and how their raising of capital and issuing of shares to contributors does not represent equity interest, aren’t trade-able and do not provide season ticket privileges. He then refers to ‘fractional ownership of planes.’ This sparked the Non-fungible bug in me.

So I responded with the comment above and a fellow Medium user, Vampiire, had this question:

Internal, centralized systems can be wiped and were never in the public’s eye to begin with. ERC-20 tokens on the Ethereum network are pretty much a new-age form of what a security would be in a new public blockchain system — it’s just that the dev geeks beat the finance guys to the punch here.

I’m educated in finance, not an expert, but know a thing or two and I would consider ERC-20 tokens for Ethereum; NEP-5 tokens for NEO Blockchain; and QRC-20 for Qtum’s blockchain to be what tokenized securities would have been if this technology was cultivated among the finance-y FinTech community. Probably not exactly the same characteristics, but your basic trade-able token.

Securities may not actually need to utilize the NFT standard because they are fungible in a sense — what does having the #1 share vs the #1,000 share provide as a benefit? Pay me 10 shares of Apple, Inc. (AAPL) common stock — will I really discriminate against the shares you pay me? No, because the 10 shares will give all of the same rights, as long as they are the 10 shares of common stock. So why use the Non-fungible token standard for tokenizing assets for fractional ownership?

Below we will dive into the Green Bay Packers ‘Utility Share’ example Lou presents and how that can be used to stimulate the viable tokenization of individual stadium seats to allow for fractional ownership of those seats.

Fungible vs. Non-fungible Tokens

In order to understand the ‘why,’ you need to understand the nuances of fungibility.

These trade-able tokens mentioned earlier are fungible tokens — they do not hold any sort of unique data within the token. Just a blank token that can be traded interchangeably. So Binance’s Binance Coin (BNB) is an ERC-20; Bodhi’s BOT is a QRC-20; and NEO’s Bridge Protocol is a NEP-5 token. Yes, we know they are tied to those projects, but they are completely interchangeable. The above are FUNGIBLE tokens as I can ask you to pay me 1 BNB out of the 10 BNB you hold — I couldn’t tell the difference between them and would accept any 1 of those 10 without discriminating against the unit. Just like the Apple, Inc. (AAPL) example above.

To be very clear — I do not believe ‘security token’ is a good word to use when describing the tokenization of unique assets. Why? Because while shares of stock have an issue number, that stock certificate issue number doesn’t really mean anything.

ERC-721 tokens, Non-fungible Tokens (NFT), are essentially tokens which contain unique data that makes them different from each other. Put differently, ERC-721 tokens are tokens with a unique identity embedded within the token.

We will replace ‘security token’ in Vampiire’s question with ‘NFT’ for the sake of this article as ‘security tokens’ could likely just leverage ERC-20 token standard with some enterprise-friendly changes. I believe Polymath is creating a new standard just for security tokens — shares of stock.

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