What are security tokens?
In the crypto world, security tokens are a special type of crypto asset designed to validate and ensure ownership rights. They also function as value-transfer instruments for different assets. These tokens have the financial characteristics associated with other crypto assets but are different in the sense that they can be programmed with unique features. In addition to that, they receive the same regulatory protections stipulated for traditional securities. Due to this, security tokens have the potential to revolutionize the way we exchange value in the financial markets.
How can security tokens change the market?
Liquidity improvement
If you sell a security on Friday, you might not be able to settle the transaction until the following Monday (that’s four days total). This inefficiency is compounded by the fact that thousands of security transactions occur every day. When these inefficiencies are removed, trades settle transactions faster and the illiquidity discount disappears.
Consider what email did to snail mail as a comparison of how big this innovation is. Until a few decades ago, sending written correspondence required mailing faxes. It was not something most people would do.
Since email has become a common communication tool, people frequently mail their coworkers for lunch, use it to keep in touch, and send memes – things they never even thought of before. Because of its ease of use, email has transformed not just the “how”, but also the “what” of our written communication.
Security tokens can do the same for finance – and this is very exciting for the future of both crypto and finance in general.
Opening up capital to global markets
Tokens may be eligible for trading on global markets based on how they are set up. Investors in China, for example, could buy equity in a restaurant in Melbourne with just a few clicks.
What is the possible market share of the global market? Over 1800+ investors from over 50 countries worldwide participated in the Origin Protocol that CoinList created.
This way, investors are able to buy shares of assets that were previously extremely difficult to acquire.
Voting
Voting rights can be programmed similar to the way dividends and rewards can. Someone who has actively traded in and out of the equity will get special voting or decision-making rights.
While this idea itself isn’t new, shareholders are still able to vote (depending on what kind of shares they hold), accomplishing this via tokenized representations of ownership. This is much more cost-effective than traditional forms of shareholder voting.
Compliance automation
Regulations are one of the most challenging aspects of trading securities. Traders must go through a company’s KYC procedure of client verification.
Due to the programmability of security tokens, compliance can be incorporated right into them. As legally compliant protocols like Polymath and Harbor work together with different decentralized exchanges. Compliance becomes exponentially easier, and almost automatic once the systems are in place.
Security tokens are here for the long run
Security tokens are a promising technology, even though at present they are underutilized. Over the next few years, there will undoubtedly be a lot more security tokens entering the market.
At the moment, there are no dominant platforms for trading security tokens, and the complex compliance issues that they raise likely mean that this will not happen anytime soon. The decision to invest in an unproven platform or a security token is, therefore, a matter of attitude: while there is certainly profit to be made by getting in early on security tokens, there are also risks associated with them.