Opportunities & Hurdles in the Complete Tokenization of Securities

Navdeep Garg
Securities

Introduction

Security token offerings are different from Initial coin offerings because security tokens are either registered with a Securities Governing Authority in the jurisdiction where the tokens are offered or the tokens are filed under an exemption, which typically makes the tokens restricted securities. STOs means an official dealing with securities. While this states that the utility part of the tokens is removed, it also means that unlike ICOs we are not bound to a specific in-project use of the tokens. Security tokens can go beyond blockchain projects and represent a securitized fraction of a real asset, such as a building or a piece of art.

It is like bringing the benefits of ICOs to the non-blockchain world while removing the bad parts. Digital securities provide an array of different financial rights to an investor. Security Digitization is the process of materializing any of the financial rights in security through the issuance of a digital asset registered on the blockchain.

Security tokens stand out as compared to IPOs or private investing. Unlike IPOs which require an arduous and expensive process with many middlemen and brokers, STOs are easy to pull off. The security tokens can be broken down and represent fractions of an asset, at sizes suitable for any investor. And unlike private investing, where investors need to wait many years until they see returns, security tokens are immediately tradable. As such, they are extremely more liquid.

Opportunities in the Complete Tokenization of Securities

Some opportunities of tokenized assets are clearly identifiable at face value while some are more uncertain. It is reasonably difficult to invalidate that the benefits of tokenizing assets are real and that the transition to tokenizing at least some traditional assets is already starting.

Most of the notable advantages of tokenizing assets stem from the increase in their flexibility. Primarily, this flexibility leads to:

Rapid Settlement
Reduced Transaction Costs/Automated Compliance
Liquidity/Market Depth
Decentralization/Reduced Barriers to Access
Asset Interoperability (Eventually, maybe)

Hurdles in the Complete Tokenization of Securities 

Compared to other technologies in the cryptocurrency space, integrating tokenized assets on a blockchain is not all that complicated technically. But the sophistication comes in from the regulatory and governance standpoint. Regulatory restrictions need to be hardcoded into the parameters of various types of tokens and they need to be recognized as an authentic representation of the asset by the law. The rapid increase of security tokens or other tokenized assets simply cannot take place without a concrete regulatory framework.

Moreover, for ownership to be effectively transferred to a decentralized network, there needs to be clearcut legal protocols for disputes,  and there is no precedent for this on a blockchain. Smart contracts remove much of the ambivalence in such scenarios, but they are not perfect tools for moderating disputes.

Eliminating the financial intermediaries sounds good on the front-end, but will inevitably place substantially more responsibility on the buyer and seller in a transaction and is unlikely to be entirely removed any time soon. Ultimately, a new framework for issuing security tokens should emerge, but we are still in the early stages of the broader trend towards tokenizing assets.

Will STOs win over ICOs?

There are very fewer chances for STOs to win over ICOs as a large reason for ICO explosion was the lack of regulatory barriers for projects to release tokens but this is not the case in the security token context. It is hard to predict if STOs will bypass ICOs but it will grow significantly over a period of time.

Conclusion

Tokenizing assets is a hot topic because of its huge potential to redefine the financial system. Many of the advantages of bringing traditional assets on-chain are clear, with some developments already in progress on how that can be accomplished. Despite their promise, the viability of a decentralized and interoperable framework for tokenized assets exchanging seamlessly among cryptocurrencies under full legal compliance is still a long ways off.

Frequently Asked Questions

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Navdeep Garg
Article written by

Navdeep Garg

I'm founder and CEO of Revinfotech Inc. I traits in leadership and brilliant practitioner in the Financial Services and FinTech. I helped ban in connecting to the FinTech ecosystem through payment acceptance in blockchain as a service and even help i... read more

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