A recent article on Forbes boldly stated, 2017 was the year of the utility token , 2018 was the year of realizing the mistake of the utility token , and 2019 will be the year of tokenized securities .
It’s clear at this point that ICO’s are not the future of blockchain. Not to say there won’t be any successful ICO’s in the future, but they aren’t the killer use cases blockchain needs to legitimize itself in the eyes of those who doubt it. It would seem that all eyes are on security tokens for the time being, but what makes security tokens such a big deal?
Many in the space think of security tokens with utility tokens as a frame of reference. When examing them and their relationship to utility tokens, it might just seem like throwing “security” before the word “token” means that the token is going to undergo more scrutiny and fall under traditional financial regulations. However, this understanding skirts over the main benefits brought from security tokens in the first place.
Before we dive into that, let’s go over some basic definitions so we’re all on the same page.
TerminologyAll tokenized assets are classified as security tokens.
Security tokens don’t have to be tokenized assets.
If a security token is tied to an asset then it is an asset-backed token .
Tokens generated to represent assets are security tokens.
A Security Token Offering (STO) is the token sale event or “ICO” for a Security Token
Why Tokenized Assets are Important
If you’re having trouble grasping why security tokens and tokenized assets are a big deal, think of it like this.
The excitement around security tokens isn’t based on the idea that some existing tokens will now be considered securities. It’s based around the idea that we can now take existing securities and tokenizethem.
Blockchains killer use case might not end up being a dApp at all. Instead, it may be that the killer application we’ve been waiting to bring blockchain mainstream is something made possible through the inherent nature of the technology itself.
Providing proof of ownership, and a transfer ofvalue.
Note: the words Security Token, Tokenized Asset, and Tokenized Security are often used interchangeably for each other.
I recently wrote that I wasn’t sure how to feel about the direction the market was going. Not relating to price action, but the types of blockchain projects that are beginning to gain traction above others. Since then, I’ve come to realize that this new wave of interest around security tokens is being generated by the same constructs that attract retail investors to cryptocurrencies. When it comes down to it, both retail investors and accredited/institutional investors are attracted to blockchain for its ability to lower barriers to entry and speed up existing processes.
With cryptocurrencies like Bitcoin, Litecoin, and Ethereum: virtually anyone with an internet connection can get ahold of some tokens. This drew in retail investors because it provided an opportunity the likes of which was previously unavailable to them. With Tokenized Assets and Security Tokens, they solve the end-users problems the same way cryptocurrencies solved retail investors problems, but they provide additional benefits that can be realized due to the archaic infrastructure around the securities market.
For example, the idea of “removing trust” from processes and transactions is a pillar of the blockchain community. Bitcoin gave people a way to transfer value without having to rely on a bank, security tokens remove trust in a similar fashion.
Think about how many companies you are trusting when you purchase a share of a company on the stock market. You’re entrusting the stock issuer, as well as long list of third-parties who help facilitate the process.
You’re trusting:
Brokers: Transfer Agents; Registrars; Clearing Firms; Custodians; and more.If that same share was tokenized, the only entity you’d have to trust is the issuer.
What are Tokenized Assets?
To tokenize something is to make the storage and management of an asset digitally represented by tokens. When someone is tokenizing an asset or security, they aren’t doing anything to the asset itself, they’re just changing the way that ownership of that asset is managed.
A security token is a digital token that represents a traditional private security. It can represent shares in a company, interest in a fund or trust, a home, an art collection, a farm, or essentially any asset that a person can own. To tokenize an asset and create a security token to represent it is to take something that is on paper, and start tracking ownership of it digitally.
Think of assets as snail mail.
Think of tokenized assets as email.
To send snail mail, you hand write (or type and then print) your message, take it to the post office, put it in an envelope, put in the receivers personal information, send it, and wait a few days for it to arrive. With email, well, you type out your message, a recipient email address, and press send.
Making the process of sending mail digital made it faster, cheaper, and far more convenient. Beyond improving the process, tokenization
Anthony Pompliano captures the nature of Tokenized Assets in this quote:
If cryptocurrencies like Bitcoin are considered “programmable money” then you can consider Security Tokens a version of “programmable ownership.” ― Anthony Pompliano
Basically ;
Security tokens are a digital representations of value that are subject to regulation under security laws.
Benefits of Tokenizing AssetsBlockchain is changing the way that we buy and sell securities. To understand why the market will move towards this technology, we need to understand the current limitations of securities, and the benefits that tokenizing an asset brings.
Liquidity PremiumWhile certain securities have liquidity, such U.S. treasury bonds, private securities such as assets or private business interests are highly illiquid. This warrants something called an “illiquidity discount”, which is the price a user has to pay for trading an illiquid asset, and is typically around 20 30%. The opposite of an illiquidity discount is a liquidity premium, the increase in value derived from the higher liquidity of an asset. Tokenizing an asset opens up the potential investor base to a much larger audience by lowering the barriers to entry and making the process of buying and selling securities more accessible. It’s never been easier for international investors to access investments beyond borders than it is with tokenized assets.