Considered the next big thing in the finance world, security tokens are here to improve and restructure the whole foundation of securities in finance. Among the greatest technological advancements of the 21st century is blockchain technology, which is a digital ledger that records transactions made in cryptocurrencies chronologically and publicly.

Blockchain forms the basis of cryptocurrencies, commonly referred to as ‘tokens’. Tokens have three main uses:

Utility Tokens

These are similar to gift cards in that they enable you to access products in the future.

Payment Tokens

These are similar to cash and are used to make payments on a day to day basis.

Security Tokens

These are considered investments, and once acquired, one can anticipate future payments, dividends or like shares, an appreciation of prices.

Security Tokens

Security tokens are digital assets which are regulated by federal security regulations. For them to earn the title ‘security token’ they have to undertake and pass the Howey Test. The test basically involves the tokens being sold as an investment and providing investors with a reliable source. Despite the Howey test being regarded as a reliable test, its application to cryptocurrencies will be an interesting phase altogether. It was not created with the vision of ever being applied to digital currencies.

Benefits of Security Tokens

As indicated earlier, security tokens are bound to revolutionize the finance world, particularly because of they eliminated the need for a middleman in investment transactions. The middleman, in this case, is basically some form of bank. The elimination brings forth several advantages, including:

Lower fees

A substantial amount of the fees charged in investment and smart contracts is usually used to pay the middleman. The elimination of the middleman translates directly into lowered costs.

Faster Timelines

Issuers of securities are able to successfully do so in a shorter timeline since they now have a direct link to investors. One could argue that the more people a deal involves, the longer it takes to seal. The elimination of the middleman hence translates into a substantial decrease in the time involved.

Free Market Exposure

Security tokens are available to anybody who has access to the internet. This is ideal especially because the internet has no physical boundaries, hence investors from one jurisdiction e.g. Asia can invest in a different jurisdiction e.g. America. Free market exposure is expected to change the manner in which assets are valued seeing as assets that are not advertised/exposed on the free market could tend to be mispriced.

More Investors

A free market exposure additionally leads to a substantial increase in potential investors. These is because just about anyone with access to the internet can be a potential investor, regardless of their physical location.

Automated Service

Security tokens will most probably breathe more life into the concept of smart contracts, thus eliminating further the need for more middlemen like lawyers in the transaction.

The Legality of Security Tokens

The fact that the cryptocurrency community remains unregulated up to now has on many occasions raised concerns. Some people have argued that the massive differences between security tokens and traditional securities create the need for the development of new laws that are more accommodative of security tokens. Despite this being the case, they’re several legal backings that one should consider while dealing with security tokens. The following are regulations derived from the US Security Act of 1933 that one should look into when dealing with security tokens in the US:

Regulation D

It exempts issuers from having to register securities with SEC. However, they have to fill up Form D which requires all information provided during solicitation of investors to be ‘free from false and misleading statements’. Further, investors are required to be accredited as per Section 506C of the Act.

Regulation A+

As opposed to Regulation D, Regulation A+ requires issuers to register with SEC. However, they are allowed to sell to investors who are not accredited. This regulation takes longer and costs more because for one to qualify with SEC they have to complete an audit.

Regulation S-

This applies to offerings that take place in foreign jurisdictions. Issuers are obligated to comply with the regulations of the foreign jurisdiction.

Disadvantages of Security Tokens

Despite the removal of middlemen, their responsibilities still have to be fulfilled. For instance, issuers are now obligated to underwrite their deals and successfully market their Security Token Offerings thereby garnering investor interest. Previously, these were the duties of banks. Traditional investors have been quick to critique this particular aspect, arguing that most potential investors lack the ability to perform these functions.

Conclusion

Security tokens offer an interesting shift to the finance and investment sector as we know it today. Despite there being valid concerns about them, one should allow them time to widely span out to be able to form a solid judgement. Meanwhile, one can only patiently wait.