Security tokens continue to reshape the way we conduct business on a global scale. These unique tokens provide companies and investors with a regulated way to enter the crypto space. When a company launches a security token it’s called an STO, or security token offering. Understanding the pros and cons of security tokens makes you a better-informed investor.
Regulatory integration is a huge step forward for the cryptospace. It allows traditional business models to convert over to more efficient blockchain-based structures. While this approach is perfect for many types of business models, it doesn’t always make sense due to some of the drawbacks security tokens contain. Let’s take a moment to examine the pros and cons of security tokens to get a better understanding of these amazing tokens true capabilities and limitations.
Pros of Security Tokens
Security tokens allow traditional business transactions to be tokenized while still meeting the regulatory requirements set in place for the industry in question. Tokenization is the process of transferring an item to the blockchain. For example, a security token can represent ownership rights in a property.
Transferring property ownership rights requires that all parties involved in the transaction meet certain related regulatory requirements. Security tokens have the ability to integrate these regulations directly into their core protocol. In September of this year, the security token launch platform Polymath partnered with BlockEstate to begin the tokenization of the real estate market.
Reducing Investment Thresholds
Security tokens are a powerful fundraising tool which allows companies to lower their minimum investment requirements to nearly non-existent. In the past, companies were forced to require that participating investors provide a certain level of funding to participate in their campaigns.
This situation led to the dismissal of interested parties that were unable to meet the minimum requirements. In other words, companies were unable to accept capital from millions of investors because the cost of processing the investor’s information and was too expensive.
Blockchain technology eliminates this problem by automating the majority of the process. Security tokens take the concept further and remove the regulatory workload through the use of smart contracts.
Enhancing Asset Liquidity
Security tokens provide investors with more liquidity. In its current state, there are thousands of investors locked into long-term investments in which they must wait until the maturity date to access their funds. Since many of these are long-term investments, it can leave these individuals without access to their money for years.
Security tokens can eliminate these concerns. Once a fund is tokenized, an investor can buy and sell fund shares as they see fit. This produces a more effective flow of assets and enables the development of secondary trading platforms to handle new market opportunities.
Hosting an STO is far cheaper than hosting an IPO. Companies can see upwards of 7% of their raised capital go towards issuance and transaction cost in a traditional IPO. The reasons for these high costs are simple. IPOs require the involvement of numerous third-party verification systems. Each adds a fee to the total cost of the transaction.
STOs reduce the cost of crowdfunding significantly when compared to IPOs. Blockchain technology allows companies to automate the most costly parts of their transactions. Additionally, smart contracts can automatically monitor, track, and distribute investment funds without the need of any third party intervention.
Security tokens allow companies to host international fundraising campaigns. Sending any form of fiat currency internationally can be a huge headache. Depending on the amount of funds being invested, you could see over a week in delays. Additionally, there is a risk of losing funds during the monetary conversion.
Security token investors eliminate these international costs. These tokens can be sent across the globe for no additional fees. Also, you won’t have to wait days for your blockchain transaction to complete. In most instances, the transaction takes minutes. Best of all, there is no need to convert your funds.
Improved Market Efficiency
The transparent nature of blockchain technology improves the current market systems significantly. Security tokens provide instant monitoring capabilities. Users can easily track their tokens and investments via a blockchain monitoring application. Investors gain untethered access to their investment’s fundraising progress.
Cons of Security Tokens
No token is without its imperfections, and security tokens are no exception to this rule. These helpful token are bridging the gap between conventional investments and the blockchain space. That being said, they are not without their limitations.
Investor Accreditation Limitations
One of the biggest drawbacks to security tokens is the inability of non-accredited investors to own them. In the US, this means that more STOs will require you to be an accredited investor as part of their SEC compliance. Unfortunately, you need to earn at least $200,000 per year, or, have at least 1 million dollars in the bank, if you want to be an accredited investor.
More Expensive than Utility Tokens
Unlike ICOs, STOs need to include a host of other organizations in their crowdfunding campaign. Underwriting companies are a perfect example of an added cost that STO participants must foot the bill for. Regulation isn’t cheap and it’s much more expensive to host an STO when compared to an ICO.
Secondary Market Trading Restrictions
Another drawback encountered by security token investors is secondary trading market restrictions. Security tokens can only be transferred via licensed platforms. The platforms must possess a security trading’s license in the country they operate in. Additionally, security tokens feature a time-lock mechanism. You can only trade these tokens between qualified investors for a predetermined amount of time after the STO.
The Pros and Cons of Security Tokens
Now that you have a better understanding of the pros and cons of security tokens, you can make an informed decision on which is the right investment for you. Remember, there isn’t a one-size-fits-all when discussing tokens and what may be the perfect fit for one business, could be a total disaster for the next.
Security tokens are the chain that links conventional markets to the cryptospace. You should expect to see explosive growth in this sector over the coming months as the advantages of blockchain technology continue to become better understood globally.
Blockpass to Offer Onboarding Services to Polymath Clients
Polymath has recognized a need for providing its clients with access to regulatory compliant investor onboarding services. Seeking a provider, they have now announced an alliance with Blockpass.
This alliance will see Blockpass provide token issuer’s access to a growing pool of pre-verified investors. In doing so, potential issuers can rest easy, knowing that their offerings only provided to appropriate investors. This means that these pre-verified investors have already undergone KYC and AML measures, ensuring they are accredited.
The goal of this move is simple – lower barriers of entry to the issuance of digital securities. By providing access to services rendered by Blockpass, potential token issuers can remove one more thing off of their lengthy token-issuance checklist. Blockpass grants access to its services through AP, making the process even easier and more attractive.
Upon making their announcement, the CEO of each, Blockpass and Polymath, took the time to comment. The following is what each had to say on the matter.
Adam Vaziri, CEO at Blockpass, stated,
“This partnership is the latest step we have taken to streamline the painstaking and cumbersome process of onboarding investors. There are many synergies between Polymath’s proposition and our own, in that we are both striving to create simplified and compliant solutions.”
Kevin North, CEO at Polymath, stated,
“We are very excited to announce our collaboration with Blockpass…This represents our continued efforts to provide Polymath issuers with access to best-in-class KYC solutions like Blockpass.”
Blockpass is a Hong Kong, China, based company, which was founded in 2017. Above all, Blockpass works to provide the digital securities sector with solutions tackling regulations and compliance.
To date, Blockpass has already experienced minor adoption, as they have seen their services integrated with Infinito Wallet – bringing support for digital securities in the process.
Company operations are overseen by CEO, Adam Vaziri.
Polymath is a Toronto, Canada, based company, which was founded in 2017. The company has established themselves as an industry leader through a variety of offered services. These platform services include specialized protocols, allowing for the issuance of customizable digital securities.
Polymath recently caught the attention of industry participants, as they announced the on-going development of a blockchain purpose built for digital securities. This blockchain is known as ‘PolyMesh’.
Company operations are overseen by CEO, Kevin North.
In Other News
Pre-verification of investors has become an increasingly popular option among industry participants. This is made evident through various established partnerships, beyond the one discussed here today. Here are a few examples of companies aligning their interests over the past few months.
Boston Security Token Exchange (BTSX) Seeks SEC Rule Change
Development of the highly anticipated Boston Security Token Exchange (BSTX) continues as one of the partners behind this innovative concept, Box Exchange, filed for a rule change from the SEC this month. The 400-page filing seeks a change that allows BTSX to offer tokenized equities in the form of security tokens. If successful, BTSX would gain valuable positioning in the ever-expanding security token sector.
Boston Security Token Exchange Details
The BTSX exchange focuses on reducing the entry barrier for businesses seeking public funding. Respectively, the platform utilizes the Ethereum blockchain. This is a smart strategy because ERC protocol standards are the most popular type of security token issued. According to the BOX’s rule change request, the BTSX platform includes full automation via integrated smart contract protocols. Officially, the platform functions as a price time execution system for trading security tokens.
One Token to Rule Them All
Interestingly, the platform will not feature a multitude of security tokens from different providers. Instead, all trades occur in BSTX tokens. This strategy provides users with a couple of important benefits. For one, Users see a 20% reduction in listing costs. Additionally, this strategy allows BTSX to concentrated liquidity on a single trading center. Also, hosting and launching new projects is more cost-effective in this way.
The BTSX token standard takes many attributes from the ERC-884 security token standard. Notably, BTSX tokens remain compliant throughout the token’s lifecycle. Interestingly, all trades must still clear through an “Approved Settlement Provider and the BSTX Participants.”
The Boston Security Token Exchange – BSTX
The BSTX platform is made possible through a strategic partnership between the BOX Exchange and Overstock’s crypto project, tZERO. Both firms are major players in the cryptomarket. Consequently, analysts predict BTSX will share in these firms’ growing influence. The BOX Exchange first raised eyebrows across the crypto space when it announced a partnership with tZERO on May 18th, 2018. The partnership gave both firms equal ownership and representation in BTSX.
Discussing the partnership, BOX CEO, Lisa Fall described why tZERO’s proven development track record was critical towards the success of the project. Fall also took a moment to touch on BOX’s past successes in the transparent equity options marketplace. She pointed out that, together, both companies can succeed where others failed.
No Reg A+
The filing pointed out some key restrictions the platform includes. For example, BTSX will not participate in any Reg A+ funding. Reg A+ funding has some additional flexibility that companies enjoy. For example, companies can “test the waters” before committing to their crowdfunding campaign when utilizing a Reg A+ strategy.
Importantly, the SEC has not approved any Reg A+ security token platforms to date. BTSX is well aware of this fact and decided it was in their best interests to avoid the delays associated with attempting to get licensing for this type of public offering.
Now, BOX and tZERO look to combine forces to become a dominant player in the security token sector. Definitely, these firms have the experience and network to accomplish their goals in the coming months. Now, the ball is in the SEC’s court.
BnkToTheFuture to Utilize Altcoin.io for Security Token Exchange
The popular decentralized exchange (DEX), Altcoin.io, announced the licensing of their proprietary trading software to BnkToTheFuture this week. BnkToTheFuture intends to utilize the software to create a non-custodial security token exchange slated for a 2020 release date. The move would place BnkToTheFuture in the exclusive class of non-custodial security token exchanges in operation currently.
Discussing the strategic partnership, Altcoin.io CEO, Andrew Gazdecki, commended BnkToTheFuture for their decision to expand into the security token sector. He explained how BnkToTheFuture shares a common vision with Altcoin.io.
Notably, both firms seek to expand tokenization. Specifically, BnkToTheFuture seeks to tokenize the world’s capital markets. The CEO of BnkToTheFuture, Simon Dixon, also took a moment to speak on the maneuver. Dixon described why Altcoin.io was able to capture their attention. He took a moment to compliment the firm’s technical achievements over the last two years.
These achievements include being the first exchange to successfully complete an Atomic Swap. An Atomic Swap is a cross-blockchain crypto trade. Altcoin.io was able to trade Bitcoin for Ethereum utilizing this second-layer protocol in 2018. Today, the platform offers this service directly from its wallet.
Altcoin.io Track Record
Importantly, Dixon pointed to Altcoin’s proven track record to strict regulatory compliance. Compliance is critical when discussing tokenization of securities, equity, or real estate. These investment tools have specific regulations that vary depending on the investment status and the region.
BnkToTheFuture wants to leverage Altcoin’s smart contract technology to enable pre-programmed compliance into each token launched. According to company executives, the new security token exchange will feature a non-custodial layout. Non-custodial exchanges are seen by many as the natural evolution of the crypto exchange.
Altcoin.io Real Benefits
Non-custodial exchanges provide traders with the highest level of protection against hackers. In a non-custodial exchange, your crypto remains in your possession until the actual execution of the trade. This strategy is in stark contrast of centralized exchanges, which require you to load funds on to a custodial wallet.
The problem with custodial exchanges is that because of the sheer amount of crypto these wallets hold, hackers find these targets to be profitable. How popular? According to one report, over $350 million in crypto has been stolen this year already. Non-custodial exchanges eliminate these losses.
Another huge benefit provided by non-custodial exchanges is the removal of withdrawal delays. Withdrawal delays are a major problem experienced by crypto traders. Basically, something happens that spooks the exchange. In turn, your funds are locked up until the exchange feels comfortable enough to give you access to your funds again.
Altcoin.io entered the crypto market in 2017. The company made headlines after completing a successful crowdfunding campaign in collaboration with www.wefunder.com. Notably, the platform was among the first Peer-to-Peer DEX exchanges available to crypto consumers. Altcoin specializes in Ethereum complaint tokens. Most of these tokens are of the ERC-20 token standard. Ethereum is by far the most widely used token standard in the market today. As a result, Altcoin’s positioning in the market is ideal.
BnkToTheFuture Lives Up to its Name
BnkToTheFuture entering the security token sector in this manner is huge news. The firm has an uncanny track record which includes investments in Coinbase, BitStamp, Shapeshift, Ripple Labs, and Circle, to name just a few.
Now, the firm seeks to claim the title as the premier security token exchange in the market. Given BankToTheFuture and Altcoin’s experience, you should expect to see major developments from these firms in the coming months.
- Blockpass to Offer Onboarding Services to Polymath Clients June 19, 2019
- Boston Security Token Exchange (BTSX) Seeks SEC Rule Change June 18, 2019
- BnkToTheFuture to Utilize Altcoin.io for Security Token Exchange June 17, 2019
- Top 5 Security Tokens to Invest In – Opinion June 17, 2019
- Neo Global Development Invests in Liquefy, Eyeing Digital Securities June 16, 2019