Security tokens provide investors with a more secure means of participating in the cryptomarket. In its current state, the crypto space lacks regulations. While many crypto investors see this lack of regulation as liberating, large-scale investors need a more secure foundation to be in place before making their investments. These requirements are the exact niche that security coins fill.
Security coins head off future regulations by incorporating today’s financial system requirements into their platform. These requirements include Know Your Customer (KYC) and Anti-Money Laundering protocols. This legal strategy provides investors with more confidence. It also makes the cryptomarket a more attractive investment to large corporations. Let’s take a moment to answer the question – Where can I buy security tokens?
Open Finance entered the market in 2014, making the platform a pioneer in the tokenization sector. The platform developed thanks to the concerted efforts of exchange technologists, securities lawyers, and experience crypto traders. The goal of the platform is to bring more transparency and interoperability into the cryptomarket.
Open Finance partnered with Harbor to increase both firms reach in the sector. Open Finance offers a streamline compliance system. Additionally, the firm partnered with multiple financial institutions. These strategic partnerships help Open Finance provide direct integration into their platform.
Open Finance is live but currently only accepts US investors. The interesting thing is that Open Finance is powered by:
The 0x protocol provides crypto users with an integrated exchange system designed explicitly for Ethereum-based tokens. Ethereum leads the cryptomarket regarding new token creation with both their ERC-20 and ERC-721 protocols seeing growing adoption globally. The 0x protocol allows security tokens transference while remaining completely compliant.
0x is by far the most popular security token protocol in use today. The platform utilizes a combination of features including an integrated API protocol that enables users to aggregate liquidity pools for their digital assets.
In the future more exchanges will be launching using this protocol.
tZero is one of the first security token exchanges available to the public. The concept behind the tZero platform is simple. The developers wanted to provide investors with a blockchain-based alternative to the current financial processes found on Wall Street and other institutional structures.
tZero incorporates a 15c3-5 risk management software that enables users by providing them with a mix of proprietary technology aimed at improving their trading capabilities. Additionally, the platform includes DLR software to ensure all participants are SEC compliant.
tZero is currently under development and is the most anticipated exchange in the space.
While the above companies offer exchanges to purchase security tokens, there are several market leaders who are focusing on assisting companies with launching these tokens. These companies are:
The Polymath platform tackles these concerns by instituting a compliant protocol into their token development. Polymath utilizes the ST-20 protocol. ST-20 lives on the Ethereum blockchain. The protocol includes built-in KYC/AML checks.
Polymath gained popularity as a smart option for tokenized property such as real estate. The transfer of real-world property via token sales requires conformity to the current legal regulations governing the item for sale. You need a regulated token to transfer to transfer regulated assets.
The San Francisco-based tokenization platform, Harbor shares similarities with Polymath in that it is also mostly used for the tokenization of real-world assets. These assets can include real estate, private securities, investment funds, company equity, fine art, and the list goes on. The platform requires KYC and AML compliance for all participants across the global economy.
The Harbor platform differs from Polymath at the protocol level. Harbor utilizes the popular ERC-20 protocol. Harbor utilizes the R-token to accomplish these tasks. R-tokens are open-source and regulatory compliant from issuance to secondary trades.
A More Secure Way to Do Business
Security tokens continue to gain popularity as the cryptomarket expands. The digitization of the economy pushed these tokens into mainstream use. Now, crypto users have an alternative to the unregulated nature of the industry. You should expect to see increased development in this sector as more compliance regulations come into play.
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.
Titles and Designations Among Industry Participants
Those that follow developments within the digital securities sector may have come across a variety of titles/designations given to industry participants. While a select few companies have set their sights on attaining a full scope of designations, most specialize in one area or another. This necessitates a high level of cooperation among companies, as issuing digital securities requires utilizing various services.
With Securitize recently attaining the title of ‘transfer agent’, now is as good a time as any to take a brief look at what positions, such as this, entail. Here are a few designations typically associated with digital securities, and a superficial look at the roles which they play.
Companies tasked with completing the roles of a placement agent typically function as a conduit for raising capital. A placement agent is usually hired by a company looking to raise capital through an STO/DSO or some other means of fundraising. Throughout this process, the placement agent will attempt to connect appropriate, and interested, parties (issuers & investors). In doing so, investors gain access to pre-vetted opportunities in their ‘wheelhouse’, while issuers benefit from access to a larger pool of investors.
Beyond simply providing token issuers access to their contact book, placement agents are able to provide certain levels of clout to relatively unknown companies through mere affiliation. In addition, they are often tasked with helping develop marketing strategies for token issuers, to more efficiently connect appropriate parties.
The following companies are examples of participants within the digital securities sector which hold the title of a placement agent.
The entire process of selling and distributing digital securities is contingent on finding a competent issuance platform. Digital securities require specific traits to be built into their coding, as they are required to be compliant with securities laws imposed by regulatory bodies, such as the SEC. This is done when they are created, using issuance protocols based on blockchain technologies, such as Polymath’s well known ST-20.
The following companies are examples of participants within the digital securities sector which act as issuance platforms.
A broker-dealer refers to a licenced company which buys and sells securities. A broker-dealer has the ability to act on behalf of, either, themselves or a client. This is a fluctuating designation which is broken down as follows:
- When securities are traded on behalf of a client, the company is assuming the role of a broker.
- When securities are traded on behalf of the company, itself, the company is assuming the role of a dealer.
The following companies are examples of participants within the digital securities sector which hold the title of a broker-dealer.
In a world which is becoming increasingly connected, new challenges regarding security measures are arising every day. This places increased importance on companies assuming the roles of custodians.
Custodians within the digital securities sector are tasked with safely storing digital assets. While their means for achieving this may vary, their presence within the sector is extremely important.
Warranted or not, blockchain based assets are often viewed together. This means that when an unregulated exchange with poor security measures is hacked, it paints a bleak picture of similar assets. To continue the upwards trajectory of blockchain based assets (digital securities), regulated custodians are of key importance. Through stringent security measures, they are able to provide a safe home for valuable assets, as well as piece of mind for their holders.
The following companies are examples of participants within the digital securities sector which provide custodial services.
For participating parties to benefit from the oft-touted liquidity associated with digital securities, these assets need a place to call home. Marketplace providers offer this, as they facilitate secondary market trading of digital securities. By facilitating the buying/selling of digital securities, investors can now easily enter and exit their positions.
The following companies are examples of participants within the digital securities sector which act as Marketplace Providers.
For companies which undergo the tokenization process and distribute tokens, a transfer agent is vital. Companies which assume this role are typically tasked with accurately tracking the activity and ownership of distributed assets. This means providing token issuers with an accurate picture of who is in possession of their digital assets, and in some instances doling out dividends to holders.
The SEC breaks down the roles of a transfer agent into the following 3 main categories.
- Issue and cancel certificates to reflect changes in ownership.
- Act as an intermediary for the company.
- Handle lost, destroyed, or stolen certificates
The following companies are examples of participants, within the digital securities sector, which hold the title of a transfer agent.
Jockeying for Position
While there are many roles and designations within the sector, these are a few of the most prominent and important found in digital securities. With the digital securities sector still in a nascent stage of growth, there are various companies jockeying for position as the ‘go-to’ entity for their specialities.
In time, we will eventually see the cream rise to the top, as select companies stand out from the pack with the services they offer.
Security Tokens vs Tokenized Securities – Thought Leaders
Since crypto is a growing industry, there still are a lot of words and concepts that are unclear to a large audience. In fact, many users struggle due to the presence of confusing jargon.
Most people still do not know what blockchain is or why it is called a blockchain. While it can be a confusing term to understand, there’s no denying the fact that blockchain is massive.
Introduction To Security Tokens and Tokenized Securities
As confusing as may sound, both the terms refer to two very different concepts. I have read a lot of articles and news pieces regarding security tokens. From my understanding, the term refers to a wide variety of assets based on blockchain.
A consultation paper published by the Financial Conduct Authority in the UK verified the meaning of the term. The paper mainly discussed the regulation and classification of crypto assets defined ‘security token’ as a recognized investment or asset concept.
Now that the meaning of security token is clear, we need to move to tokenized securities. A lot of people believe these terms are interchangeable when in reality they are not.
They refer to two different concepts and using one in place of another can lead to confusion. They imply different regulations, investors, and constructs. Hence, it is important to be aware of the difference between the two so you make no mistakes in using the right term.
Security Token and Tokenized Security – The Difference
The difference doesn’t lie in grammar. It may look like a shift from active to passive but there’s more here.
Security Token: In this phrase, “security” is the adjective and “token” is the noun. It refers to a new technology that shares some qualities with traditional securities.
Technology is the main focus in this case. Not all tokens are referred to as securities. In fact, regulators appear to be confused about the classification of some new tokens due to their novel concepts.
If it pays dividend then it’s considered a security. A security token does not necessarily have a utility. It offers tangible benefits and represents a share in the company behind the token. This is why security tokens are also known as equity tokens.
Moreover, security tokens are different from utility tokens. They are either filed under an exemption or registered with an authority. Due to this, security tokens can be used outside of blockchain projects.
Tokenized Security: In this phrase, “token” is an adjective, whereas “security” is the noun. It refers to a traditional security or asset that comes wrapped in the latest technology.
All tokens are considered securities in this case. They work quite like off-blockchain assets but use a different set of technology to work.
Here, the main focus is on ‘use case’ and not the technology used. This is why such tokens are easy to regulate.
After all, it is easy to understand and categorize a traditional security that’s traded differently.
Given the huge difference between the two, it would not be fair to confuse the names.
The Authorities Involved
The Security and Exchange Commission (SEC) regulates security tokens. However, the relationship between the SEC and digital coins seems to be a bit confusing.
A transaction will be considered a security if:
- Money is invested.
- Profit is expected.
- Efforts are required.
- A common enterprise is involved.
The situation became clear in 2016 when Ethereum lost about half its value due to a major hack. This caused a sit in the industry, forcing the SEC to think about the future of digital tokens.
Last year, the SEC sent a letter to Ted Budd talking about digital assets and how they should be dealt with. While the response to the letter cleared a few things, most experts agree that the position of digital securities is still not fully clear.
Many organizations are also jumping the bandwagon. The Swiss Exchange recently announced plans to build an exchange for tokenized securities. According to FINMA, the exchange will be properly regulated.
Most experts believe that the involvement of such big names is a good sign for the industry but we’re not yet sure of how this will play out.
Take a Step Ahead
Tokenized securities are designed to broaden the market while also enhancing liquidity. It’s the same as using a known asset and putting a digital wrapper around it.
It’s not a new product from the perspective of regulators. It’s merely a new distribution channel, which makes approval easier.
On the other hand, it’s a different ballgame when it comes to security tokens. They present a new challenge for investors and regulators as it is hard to figure out the risks and ramifications involved in dealing with them.
Tokenized securities are highly innovative and have their own place in the industry. We may see more such securities hit the market in the near future. It’s actually good for the industry as the huge supply will enable traders to get a grasp of things and understand how it works.
Advantages of Security Tokens and Tokenized Securities
You will realize that a lot of the benefits are similar in nature.
Security tokens offer more liquidity by enabling fractional ownership and lowering minimum investments. More people will be able to invest due to lower requirements. Businesses are also taking advantages. A good example would be Mayfair Gallery, which put its art collection for sale on the blockchain.
Similarly, tokenized securities are more efficient and scalable. Security tokens help reduce cost, simplify auditing, reduce paperwork, lower issuance fees, etc.
Other benefits include transparency and ease.
The Legal Aspect of Things
Since security tokens are subject to federal regulations, they are compliant. You need to be aware of three regulations:
Regulation A+: This allows investors to offer an SEC-qualified security to non-accredited investors (max $50,000,000). Due to registration requirements, such issuance can take longer and also cost more than other options. Plus, it requires qualification of a Form A-1. Moreover, the amount of money you raise is also considered revenue and hence is taxed unless it represents equity in the company.
Regulation D: This requires an electronic filing of “Form D” without needing registration with the SEC. The seller may solicit investors for offerings that meet the requirements found in Section 506c. This part of the law requires the offerer to be true and accredited.
Regulation S: This comes into play when a security is executed outside of the US and hence is not subjected to the 1993 Act. However, issuers are still required to follow the laws of the country where the security is offered.
What It Really Means
You can draw some analogies when it comes to tokenized securities. Think of print magazines and how they’re now available online. The format is the same but the reach has increased due to more access.
Security tokens work similarly. It’s a concept that nobody saw coming. At the end of the day, both concepts will change capital markets and improve access. However, only one will have a lasting impact and change how we look at capital markets.
Security tokens need space and support to stay strong. It’s important to be clear about what the term means. We’ll, however, not be able to enjoy the benefits of these concepts if we are not able to differentiate between the two. Beyond linguistic differences, what’s more important is vital aspects as liquidity and more institutional grade Reg A+ offerings which will bring more confidence to the market.
Education and investor protection are vital elements of the ecosystem, hence at ABOTMI we work a lot on providing more solutions to increase transparency in digital asset industry. Investors who risk with their time and money deserve a seamless discovery process connecting to the most reliable and trustworthy digital asset advisors across the globe.
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