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Four Things You Need to Know About Security Tokens

Frank Wagner, Founder and CEO of INVAO

In December 2017, it seemed that the new, digital economy was about to propel itself into every aspect of the financial world, with returns soaring and endless promises ahead for blockchain-based ventures. Beyond that, full mainstream adoption appeared to be set for the immediate future. Flash forward to September 2018, when cryptocurrency and blockchain-based startups raised less than $300 million from ICOs. Among the myriad of issues plaguing the crypto world - to be solved by the leading experts in the field and by respective governments and financial institutions - is that of security tokens.

For those unfamiliar, a security token is a digitised asset which is created with the intention of incurring value and returns for the holder. While in the past the world of these digital assets operated as a ‘wild west’, new regulation - in which security tokens are regulated in the same way as traditional assets - is already transforming cryptocurrency as we know it.

Here are the four things you need to know about security tokens right now:

1. Security tokens are trustless

Typically, investing in stocks and securities means entrusting money and returns to an intermediary. By operating on the Blockchain, security tokens are referred to as trustless, because no one needs to be entrusted with finances and all blockchains are public, transparent, precise and have untamperable record-keeping.

2. Security tokens promise liquidity

Liquidity, the ability to buy and sell assets without impacting the price of said asset, continues to elude the traditional stock market. Security tokens have the disruptive ability to represent the ownership of an asset with the capability of being traded for fiat currency or an alternative cryptocurrency on global security token marketplaces and exchanges. The promise of global liquidity is an invaluable trait of security tokens.

3. Trading on traditional assets is now 24/7

A security, in the traditional financial sense, is a representation of monetary value or ownership which can be traded. A security token is simply a digitisation of the traditional security, acting as proof of ownership of the underlying asset. Security tokens are, in short, assets that can be traded outside of market hours. The existence of security tokens, therefore, means that trading and investing is no longer confined to predefined times and can be done at any time, day or night. It is estimated that new security token trading market outworks the traditional security market 5:1, with approximately 7,000 more trading hours per year.

4. Regulation is based on jurisdiction, and that’s not enough

Currently, security tokens are regulated according to the jurisdiction in which they are based. This means that if a token is established in the U.S., it is subject to the laws of the SEC and must be regulated as such. Regulation is very different for a token based in the U.K. or in any emerging market, for example. In each geography, companies operate differently, leading to competitive regulatory environments between those seeking to be blockchain hubs to attract the most innovation and economic activity. There is now a demand in the industry for self-regulation in the crypto market, to stabilise and standardise activity across the board and create a more credible, legitimate environment. This way, the potential for security tokens to become the new investment norm can become a reality.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.