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.
Archax Gears up for Launch with Quod Financial
Today, a forth coming digital securities exchange, Archax, has announced a partnership with Quod Financial. This pairing will see Archax turn to Quod Financial for various services, ranging from smart-order routing, trade automation, to order management and more.
These services are made available through integration with Quod Financial’s ‘Adaptive Execution Platform’. Capabilities made possible through this platform will allow for Archax to effectively deliver their product to institutional investors this coming year. If they achieve this goal, Archax will become – with the help of Quod Financial – one of the first offerings of its type seen in the industry.
In their press release, representatives from both companies took the time to elaborate on the development.
“Archax will be the first venue to bring digital asset trading into the mainstream financial community. Existing crypto venues have been primarily retail driven, and so it has been incredibly challenging for our buy-side and sell-side clients to include any form of blockchain-based instruments in their portfolios as they have lacked a regulated and stable venue. Given the rigorous selection process, we are proud to have been selected for this market-changing project to bring both digital assets as well as our data-driven execution intelligence to a wider audience.”
“We wanted to find a best-of-breed partner with an established and proven trading platform used by both the buy-side and sell-side. And one that was ready to handle the complexities of digital assets. Quod’s open, scalable and robust platform fitted the bill perfectly and we are happy to be able to offer it to clients as one of the ways of accessing our exchange…A key decision when evaluating technology providers from the traditional world was to find a platform that could be fully customised to support the new and developing security token space. Quod’s design, using industry standard architecture, allows easier customisation when required. That, coupled with their experience of handling high throughput trading for many tier-one banks and an array of other established regulated clients, made them an ideal partner.”
Quod Financial is an established company specializing in capital markets. Since their launch in 2004, the company has expanded from London to maintaining offices in New York, Paris, Hong Kong, and Dubai.
Company operations are overseen by CEO, Ali Pichvai.
This London based company was founded in 2018 by Graham Rodford, Matthew Pollard, and Andrew Flatt. The company is aiming for a 2019 launch of their platform, designed to act as an exchange for digital securities.
In Other News
Archax, in particular, has found themselves in our news feed various times in past months. They have had an impressive development period, resulting in investments from SPiCE VC among others. Check out the articles below to learn a little more about Archax.
seriesOne to Utilize ST-20 Standard by Polymath
Various companies have made announcements detailing intended usage of token standards lately. As the development of various crowdfunding platforms in the digital securities sector continues, the time has come for many to choose what they feel is the most promising standard. With this in mind, seriesOne has just announced that they have partnered with Polymath.
This partnership will see seriesOne utilize the ST-20 token standard to issue and manage digital securities. The ST-20 protocol is based off of the Ethereum blockchain, and will allow for seriesOne to maintain compliance with global regulations governing the industry.
The Future is ST-20
For seriesOne, it was a simple choice to settle on ST-20. This token standard was one of the first to be developed specifically with digital securities in mind. As such, Polymath has had more time than most to develop, hone, and market their offering. This effort has seen the standard adopted by various companies, with seriesOne being the most recent.
In their press release, the CEOs of each company took the time to express their thoughts on the announced partnership.
“Investors around the world trust Polymath, which was fundamental to our decision to work together…We are confident that working with the Polymath team using the ST-20 protocol will enhance the process of raising capital on our platform.”
“Polymath is proud to work with innovative partners like seriesOne, who has fulfilled a specific demand for a turnkey financing portal for any fundraising process…We are thrilled to be the chosen technology standard for the seriesOne platform, and we look forward to demonstrating yet again how industry can work together to set a standard for creating and managing a successful Security Token Offering (STO).”
seriesOne is a crowdfunding platform, which specializes in the issuance, distribution, and management of digital securities. Through their platform, issuers are able to effectively, and efficiently, host security token offerings. The company is based out of Miami, and was founded in 2013.
Polymath is a Canadian company, which maintains headquarters in Toronto. The company was established in 2017, and is spearheaded by CEO, Kevin North.
To date, Polymath and their token standards remain one of the most adopted solutions in the young world of digital securities. Their own utility token is available for trading on various industry leading cryptocurrency exchanges such as Poloniex and Bittrex.
In Other News
Each of these companies discussed here today have found their way into our headlines in recent months. For a look at what they have been up to recently, make sure to check out the few articles listed below!
Assurely presents the CrowdProtector
In a recent announcement, Assurely and AXA XL have indicated they are teaming up. The result of this partnership is the launch of the CrowdProtector insurance service.
In this relationship, AXA XL provides the insurance, while Assurely has developed the platform to deliver this service within the blockchain industry.
CrowdProtector is a service that was designed by Assurely, with the intent to provide all participants in crowdfunding events with insurance. The crowdfunding events that this product is tailored towards includes the increasingly popular, STO.
The product works on two main fronts.
- Protect the issuer
- Ensures protection from potential lawsuits brought forth by disgruntled investors
- Protect the investor
- Ensures issuers remain compliant with obligations and transparent with operations, with compensation otherwise
With one of the main draws behind STOs being the safety associated with the process, it is only logical that a third party insurance service would be developed. A service such as CrowdProtector should come as a welcome development for conservative investors looking to partake in the growing sector.
Despite only recently launching, the CrowdProtector service has seen early adoption through various platforms. A few examples of these include TruCrowd, CryptoLaunch, Silicon Prairie, Fundanna, and Nvsted.
In their press release, representatives from both Assurely, and AXA XL, took the time to comment on this development.
“New economic markets, such as crowdfunding or online capital formation, create great new opportunities for the Main Street investor, but also pose new risks…To combat new risks in new markets, investors look for a symbol of safety, validity, and trust. Online capital formation and crowdfunding – both equity and STOs – lack this symbol today. This marketplace needs trust, safety, and confidence among both issuers and investors to thrive; something that regulations and funding portals alone may not completely satisfy.”
Dan Kumpf, CUO of AXA XL, stated,
“We are excited to partner with Assurely and their technology-based underwriting of CrowdProtector™ policies…This solution demonstrates the value of insurance in helping opportunities move forward. New crowdfunding practices are proliferating today. Without proper coverage, millions are at risk. Our work with Assurely is a great example of innovation in the industry. Collaboration between incumbents and innovative InsurTech startups such as Assurely, will yield a positive result for the industry and advance it as a whole.”
AXA XL is a branch of the world renowned insurance provider AXA. They are a company which employs thousands of individuals globally. They maintain 19 offices in 17 different countries.
This New York based company was founded in 2016. They have strived since, to develop a platform allowing for the integration of traditional insurance services within the world of blockchain. The culmination of these efforts, since launch, have led to the aforementioned CrowdProtector Platform.
- Equity Tokens vs Security Tokens March 20, 2019
- Archax Gears up for Launch with Quod Financial March 20, 2019
- seriesOne to Utilize ST-20 Standard by Polymath March 20, 2019
- Assurely presents the CrowdProtector March 19, 2019
- Verseon to use BlockRules Platform for Upcoming Security Token Offering March 18, 2019