Security Tokens Are The Key To Tapping A Multi-Trillion Dollar Industry

“The blockchain will massively disrupt financial products on Wall Street.” - Larry Summers, Former US Treasury Secretary

What is a Security Token?

A security token is simply a cryptocurrency token that represents ownership of an asset. Think of this like a stock or equity ownership in a public company. Investors on stocks expect profits, in the form of stock price appreciation and/or dividends, not utility. This is essentially how a security token functions. Security tokens provide ownership of an asset and returns but NOT utility (e.g. using cryptocurrencies to buy gifts, share power, etc.)

Security tokens are regulated offerings involving ownership of an asset, usually for accreditors investors with extensive KYC, and are issued via a Security Token Offering (STO), unlike their utility token counterpart which conduct unregulated crowdsales with no ownership in the company or any asset.

There are 4 main use cases for security tokens:

1)    Real Estate - A unit of real estate can be tokenized and distributed as an investment, similar to REITs (Real Estate Investment Trust)

2)    Financial Instruments & Investments - Companies can tokenize and issue stocks and bonds in return for ownership and/or a return on assets. The primary use case here for early adoption will be around illiquid securities like private placements, term loans, and other illiquid securities that still have prehistoric processes, methods of exchange, and distribution.

3)    Venture Capital - LP shares can be tokenized and distributed to investors

4)    Commodities - Tokenizing assets like gold and silver for investors that are backed by physical assets

“The blockchain will bring...efficiency to the financial markets” - Bob Greifeld (Chairman, NASDAQ)

Why Are Security Tokens Important?

The reason why these tokens will revolutionize and disrupt Capital Markets is due to the extensive programmability of tokens. For example, stocks are just paper or electronic representations of ownership in an asset, They just sort of sit there, locked away, with no functionality. Security tokens, on the other hand, can utilize smart contracts to program variable functions that can ultimately eliminate back-office jobs. You can program dividend payments and schedules, corporate governance, and proxy voting directly into the token. Say bye-bye to many back-office jobs as there is no need to staff and employee people for this function when it can be embedded into the token. Security tokens also give you access to 24/7 markets, have lower transaction fees, and provide greater liquidity, as you are able to access and trade across global markets. 

How Are Security Tokens Regulated & Compliant?

The reason that there are only a few security tokens currently in the crypto space is very simple. It’s hard and agonizing to go through the legal webs and regulations around how tokens need to be structured technologically.

Security Tokens are being standardized according to the ST-20 security token protocol, which is being pioneered by Polymath. This essentially embeds the regulatory requirements (by the SEC for example) into the token, making them only available to verified participants. Authorized investors must meet all the criteria to able to transact in a specific security token, which will vary depending on the token. This provides assurance to the issuer that the tokens will only be held by authorized investors.

 The NASDAQ got to $5.4 trillion in 1999, why shouldn’t crypto assets be as big?” - Mike Novogratz (Head of Galaxy Investment Partners, Billionaire and former hedge fund manager)

What Is The Market Potential? Putting things into Perspective

In 2017, Securities tokens made up $100 million (roughly 1%) of the total cryptocurrency market cap while utility tokens made up $700 billion. Security tokens were dismissable and highly irrelevant 3 years ago with all the focus on Blockchain platforms, protocols, and utility tokens but their time to shine could be upon us as the focus in 2021 shifts toward Bitcoin once again. Now that cryptoassets are in the spotlight, security tokens may finally get the recognition they deserve in the near future as the platform that facilitates the shift to the new age of capital markets and trading.

Since utility tokens have taken the Cryptocurrency space by storm at a rapid rate and have been plateauing since 2018, I think the next wave will be the emergence of security tokens which I expect to gain traction before 2025. Security token market caps will ultimately pass the cap of utility tokens as it’s a much larger industry that involves the world's fortune 500 companies issuing ownership of assets.

Security tokens will lead us to mass corporation adoption of Blockchain technology, not to mention the disruption of the current capital market landscape.