Security tokens function as investment contracts wherein the purchaser anticipates future profits from dividends, revenue share, or market appreciation. Security tokens differ from utility coins in a couple of ways. The main difference between these tokens is that security coins follow strict guidelines regarding who can purchase these coins and their transference.
Security vs. Utility Token
There are currently two types of tokens in the cryptospace – security tokens and utility tokens. It’s important to learn the differences between these two types of tokens. You should also understand that some tokens start off as security tokens during their ICO, but later develop into utility tokens following the development of the platform.
Many investors prefer security tokens because the coins adhere to the SEC’s legal restrictions. Security tokens are the direct result of a desire by investors and businesses to utilize a blockchain-based crowdfunding system that conforms to the SEC’s current IPO requirements. These regulations include the implementation of Know Your Customer (KYC) protocols. KYC laws require all investors to reveal their identity before they can participate in the crowdfunding event.
Security tokens provide participants with a more transparent investment experience. Startups offering security tokens must provide investors with a plethora of legally required information such as the company location, financial statements, business purposes, and management. All valuable pieces of data to be sure about before making any investment. While utility token investments can provide this information, they are not legally required to currently.
Additionally, there are few examples of ramifications for utility token providers who falsified information provided. These laws offer valuable protection to all parties involved, and many in the crypto space believe them to be critical in curbing fraud and spurring wide-scale crypto adoption.
Due to the unregulated nature of the cryptomarket, there are a significant amount of fraudsters in the space. These individuals prey on new investor’s doubts and misgivings to make a profit. One study put the number of fraudulent ICOs in 2017 at eighty percent. Given the amount of fraudulent activity in the cryptomarket, it’s no surprise that investors seek a more secure alternative to the status quo.
Large Scale Investors
Security tokens attract more large-scale investments because they are subject to legislation that protects investors such as the Securities Act of 1933 and the Section 3 of the Securities Exchange Act of 1924. These protections are necessary to prevent fraudulent activity from occurring in the market. This added security provides a safer transaction for both investors and corporations looking to utilize blockchain fundraising strategies.
More Security for Your Corporation
Users aren’t the only one benefiting from security tokens. A business that chooses to offer security tokens gains the confidence of knowing that they will not be subject to later legal, or financial, ramifications resulting from their ICO. Their tokens are in line with the SEC regulations and, therefore, the company can operate with greater confidence.
Utility tokens serve a specific purpose within the platform. Additionally, they do not pay investors any dividends or revenue share for holding the coin. A perfect example of a well-known utility coin is Ethereum. In July, the SEC ruled that Ethereum (ETH) is not a security. One senior SEC official stated that Ethereum was a security during its initial coin offering (ICO), but that in its current status it’s a utility token.
The Howie Test
It isn’t always easy to determine if a coin is a security or utility token. Also, it’s important to remember that the SEC could alter their language and consider even utility tokens as falling under security laws in the future. Despite the uncertainty of the market, you can employ the Howie Test to self-verify a token’s standing in most scenarios.
- Are You Investing Money?
- Do You Expect Profits in Return for Your Investment?
- Are You Investing in a Common Enterprise?
- Will Your Profits come from the Efforts of a Promoter or Third-party?
The token you are researching is a security token if you answered yes to these questions. Additionally, if the profit received from the investment is entirely outside of your control, the chances are good that the token in question falls under security laws. The Howie Test originated during the Supreme Court case SEC v. W.J. Howey Co. The SEC alleged that the Howie Company of Florida violated Securities Laws when it failed to register a land investment agreement with the SEC. The deal involved an investor purchasing half of the company’s unused land so that they could develop the rest of their land into more citrus fields.
The Supreme Court determined that because the investors had no “knowledge, skill, and equipment necessary for the care and cultivation of citrus trees” that they were acting as speculators. In other words, they invested in the land with the hopes of making a profit from the efforts of someone else.
The SEC determined that the investments made were not for the land, but instead, for the opportunity to share in the future profits of the large citrus fruit enterprise. The Howie test works when applied to cryptocurrencies, but given the shifting nature of tokens, not all coins can be precisely defined using this technique.
Disadvantages of Security Tokens
There are also some disadvantages provided by security tokens. The main obstacle to this type of token is the reduced liquidity. You can’t send a security token to just anyone without complying with KYC protocols. These restrictions add another level of operations to your fundraising requirements.
Companies need full transparency to host a Securities Coin Offering (SCO). The SEC requires a treasure trove of information from companies looking to host SCOs including complete financial statements. The organization only approves companies that meet these stringent guidelines one-hundred percent.
A More Secure Option
Security tokens fill a much-needed niche in the cryptomarket. The added transparency provided by these tokens should help to spur increased investment. While many love the anonymity provided by many platforms in the decentralized economy, large investors seek the stability required by the current financial systems in place. Security tokens accomplish this task perfectly.
PWC & Crypto Valley Association Release Yearly STO Market Report
As the STO market continues to expand, reporting has now taken center stage with investors and companies seeking more insight into the intricacies of the market, This week, PricewaterhouseCoopers (PwC) Strategy Switzerland and The Crypto Valley Association released their highly-anticipated Spring 2020 STO/ICO market report.
This twelve-page document is packed with insightful information to help guide investors and blockchain firms moving forward. Importantly, the report features an easy-to-read layout complete with graphics and tables to help you better understand the statistics. Blockchain-based firms rely on this yearly overview to get a new perspective on developments within the initial coin offering (ICO) and security token offering (STO) markets.
PWC & Crypto Valley Association – Real Insight
The study includes all types of data that would be useful to professionals in the sector. For example, you can see items such as the total number of offerings or what countries are the leading hubs for blockchain crowdfunding projects. Additionally, you can see statistics on how governments, corporations, and traditional banks utilized blockchain or distributed ledger technology (DLT) to tokenize financial instruments such as securities.
The report shed some light on last year’s market movements. For one, the data suggests that the overall volume of token launches dropped about midway through 2019. In total, the report identifies 380 token offerings that completed throughout last year. These offerings raised a combined total of around USD$4.1 billion.
Initial Exchange Offerings – PWC & Crypto Valley Association
Uniquely, the report also had a section dedicated to initial exchange offerings (IEOs). These new financial instruments saw a significant increase in use during the later part of the year. Notably, the report shows that the Bitfinex IEO led the pack with a total of $1 billion in funds raised.
The study also highlighted the institutional infrastructure and emerging regulatory framework seen in the sector. These regulations helped to spur more blockchain participation from traditional entities such as banks and governments. The report points out that the Austrian Government, World Bank, Daimler, and Bank of China all directly-issued tokenized assets. These assets included securities, bonds, loans, and commodities.
Regional Statistics – PWC & Crypto Valley Association
The PWC report also gave some insight into the geographic regions with the most successful blockchain projects launched. The USA, Singapore, and Hong Kong led the pack with strong positioning across the market. Additionally, some smaller countries made it into the top spots such as the British Virgin Islands and the Cayman Islands. Both of these locations hosted major events in 2019 including the EOS and Telegram ICOs.
Europe also saw significant growth in the market. The study pointed to Switzerland and the U.K as the leading hubs in the region. Also, Estonia took a top spot for its continued development of the country’s blockchain market.
The PWC analysis will work as a guiding light for companies seeking to expand their blockchain positioning in 2020. This yearly report continues to produce insightful and valuable market insight. In turn, you should expect to see more firms depend on this data to make the right tokenized crowdfunding decisions.
Security Tokens to Headline the Crypto World Summit
In another sign of the times changing for the better, this year’s Crypto World Summit will focus heavily on the security token market. This year also marks the 4th consecutive year for the forum which focuses on the most important blockchain-related issues globally. The news marks a shift by the Crypto World Summit from traditional blockchain projects, over to heavily regulated digital assets.
According to a recent press release this year’s event will commence at the world-famous Sheraton New York Times Square Hotel. The event’s official start date is February 20th, 2020. Event coordinators confirmed that the majority of speaking sessions will focus on a number of movements related to security tokens and STOs.
As such, speakers will discuss the major roadblocks to adoption in detail. These primary concerns usually fall into three main categories. Firstly is a lack of understanding of the existing SEC laws, rules, and regulations regarding tokenized assets. From here, discussions will include a synopsis of the lack of regulatory framework specifically tailored to these new financial tools. Finally, speakers will discuss how to address these primary issues in a logical manner.
Crypto World Summit Sessions
The Crypto World Summit will feature some amazing insight into the current state and future of the security token sector. One of the most exciting sessions listed on the event is a forum called -The Revolution of Tokenization. This discussion will touch on the overall benefits achieved through tokenization, and how they can improve the overall health and security of markets.
Additionally, there is another session labeled the Securitization of Illiquid Assets. This discussion will touch on how tokenization creates new forms of liquidity in the market. Importantly, the discussion will explain how these new markets will affect the overall global economy and investors in general.
Security Token Offerings
From there, conference attendees can gain some valuable insight into STOs. STOs are seen as the natural evolution of the ICO sector. These fully-compliant token offerings are now more popular than ever. Developers hope to shed some light as to why these crowdfunding campaigns surpass traditional IPOs and ICOs.
Blockchain and Real Estate
No security token seminar would be complete without an in-depth discussion on the effects of tokenized real estate in the market. Tokenized real estate is one of the fastest-growing security token sectors internationally. Tokenizing properties provide some huge advantages over traditional real estate sales such as lowering the entry threshold. Additionally, this strategy allows for global investor participation and crowdfunding of single properties.
The Digital Banking Industry
Another session labeled, The Digital Banking Industry is sure to touch on the development of new-age banks focused on catering to digital asset holders. Already, a number of these organizations have sprung up across the globe. These unique banking institutions seek to provide digital asset holders with many of the benefits and features found in the traditional banking sector.
Perhaps the most interesting forum to be held at the Crypto World Summit is the tokenization workshop. Here, visitors will learn exactly what it takes to tokenize a real-world asset. The workshop promises to provide valuable insight into the technical aspects and legal ramifications surrounding the tokenization of particular assets such as debt-equity.
Join the Crypto World Summit
For those interested in participating in this monumental event, but are unable to visit New York, there are options. The entire conference is set to be live-streamed via Fintech World Media. In other words, there really is no excuse to miss out on this exciting event.
What are Digital Securities?
Digital securities continue to see further adoption by traditional investment firms for many reasons. These tokens remove many of the barriers encountered by investors and streamline the entire security process from issuance to oversight. Additionally, they provide new market opportunities to nonliquidable investments. For all these reasons and many more, security tokens are here to stay.
Digital securities, or security tokens, come in many forms. All of these forms share one thing in common, they are digital representations of securities, and therefore, subject to traditional securities laws. Importantly, not all digital assets are security tokens.
Security tokens emerged at the tail end of the 2017 bull market run in response to the rising amount of fraud in the space. Investors lost billions on Ponzi schemes such as Bitconnect. Real projects needed a way to distinguish their tokens from the scamsters and traditional investment firms needed to utilize blockchain technology in a regulated manner.
Digital Securities are Born
Digital securities can represent all types of assets including investment contracts, shares of a corporation, a portion of a note, debt security, or even a fractionalized interest. Basically, any electronically registered and transferable debt, equity, or asset that issues or trades using blockchain technology is a security token.
Benefits of Digital Securities
The benefits blockchain technology brings to the sector are immense. For one, ownership is verified and recorded on a distributed ledger. This provides a more secure alternative than traditional methods. Additionally, blockchain technology allows for the transfer of private and non-listed alternative assets. Consequently, security tokens provide more opportunity, efficiency, and liquidity in the market.
Security tokens wouldn’t exist if smart contracts never entered the scene. These preprogrammed protocols can be developed directly into the token. This strategy allows for the automatic enforcement of all regulations. Basically, smart contracts help eliminate much of the redundant paper-based processes currently in use.
Types of Digital Securities
Today, there are more types of security tokens than ever before. The market continues to develop as more advantageous tokenization concepts emerge. You should expect to see this trend continue as security tokens lend themselves perfectly to many markets. Below are the most common types of digital securities in use today.
The real estate sector experienced an explosion of tokenization strategies over the last year. Both developers and tokenization platforms went all-in on tokenizing property. Tokenized real estate has some clear advantages. For one, it allows for the sale to be fractionalized. This strategy lowers the entry-level for investors and provides more opportunities for diversification.
The tokenization platform Polymath made headlines in September 2018 after inking a partnership with the real estate development firm BlockEstate. As part of the strategy, the Block Estate Alpha Token, or BEAT was born. This token utilized Polymaths unique Ethereum token standard ST-20 to ensure that the project remained compliant. Each token represented a share in the ownership of the fund.
Perhaps one of the most popular ways in which digital securities see use is venture capital. Security token offerings (STOs) provide business with all the benefits of blockchain technology such as global reach, added security, and instant trackability. Additionally, STOs allow companies to stay within the regulatory guidelines of their industry and region when hosting a crowdfunding event.
Private equity is another type of security token that continues to see more adoption in the space. These security tokens can also go by the name equity tokens. Equity token offerings (ETO) are more popular than ever before because tokenized equity provides more liquidity in the market.
One of the best features of tokenization is that it can be applied to so many types of assets. Real assets such as gold or diamonds already live on the blockchain. Not surprisingly, these tokens were among the first type of security tokens to emerge.
While the concept of tokenizing assets like gold isn’t anything new to the market per se, the ramifications of these maneuvers are evident. For one, tokenization platforms now seek to not just tokenize gold but to utilize the gold tethered token as a new form of stablecoin.
Stablecoins are coin tethered to real-world assets such as the USD, or in this scenario, gold. These tokens allow users to get the benefits of cryptocurrency but avoid all of the volatility found in the market today.
Tokenized hedge funds are another perfect example of digital securities. Hedge funds are a great way to diversify your portfolio. Traditional hedge funds are restricted in their trading times and the methods used to transfer these assets are outdated. Tokenized hedge funds create a frictionless experience for investors.
The Protos Hedge Fund includes a number of the top cryptocurrencies in existence. The fund sold $6.5 million during its primary issuance. Notably, Protos was the first licensed tokenized hedge fund to trade on an Alternative Trading System (ATS) in the US.
Digital Securities – A Bright Future
Now that you understand what digital securities are, its easy to see why they continue to see adoption in the market. These new-age financial tools provide more investment opportunities and reduce the workload and costs usually associated with these transactions. You can expect to see security tokens become more popular as these advantages become common investment knowledge.