Start Talking Security Tokens: The What, Why and How
Security tokens and their potential for the blockchain industry have become the latest talking points amongst investors and institutions alike, and it’s not surprising why. Various offerings can be made via security tokens: real estate, stocks, equity and more are digitized, enabling groups of investors from around the globe to participate in this new and exciting option that is taking the world by storm. If this is the first you’ve heard about it, read on to find out why this year has been marked as the year of the security token.
What Are Security Tokens?
A security token is a digitized representation of ownership in any type of asset put onto a distributed ledger. This representation could take the form of equity, debt, voting rights and more. Security tokens function similarly to an investment contract. These tokens are purchased based on their potential to appreciate in price and value or for their ability to earn dividends.
Security tokens are currently building bridges between traditional finance, blockchain and other industries like real estate. They can also offer a variety of benefits to interested individual and institutional parties. The nature of the technology is that it increases compliance, enables fractional ownership, puts immutable records on the blockchain, lowers the cost of transfers, and bolsters the global availability- just a few of the reasons people are getting onboard the security token train.
The Benefits of Security Tokens
Traditional financial processes involve the use of a lot of middlemen, which can drive up costs significantly. The use of middlemen and intermediary services also dramatically affect the execution times of agreements and transactions, which become longer and longer the more people and processes are involved.
Digital assets such as security tokens, on the other hand, completely remove the need for an intermediary, making the necessary processes faster and much more affordable. Security tokens check all the above boxes by being easily accessible through the internet, removing borders from investments and adding a global pool of potential investors to join the overall mix while maintaining minimal costs and processes involved.
Security tokens can be traded via licensed token trading platforms, which also increases the liquidity of the tokens greatly compared to other asset classes. Furthermore, classification as a security nowadays adds a layer of transparency due to the regulations which have been put in place.
Growing Market Demand
Market demand for security tokens has steadily grown due to the multitude of use cases that have been made possible by its development. This has lead to many institutional investors and bigger companies expressing investor interest in the sector and even launching their own versions of security tokens. It is evident that more companies than ever before want to leverage the power of blockchain and smart contracts, and are using security tokens as a means to achieve this goal.
The flexibility which is made possible by the high-liquidity that comes with security tokens has made the components of these companies steadily both more valuable and tradeable than their non-blockchain counterparts. This simultaneously has fueled individual investor interest, as these investors gain access to the liquidity benefit of crypto tokens without as much exposure to the risks of the market.
Another interesting avenue for security tokens is the fractional ownership of assets. Through fractional ownership, several parties or groups can share the ownership of a tangible asset such as real estate. Fractional ownership is not a new concept, but has in the past been slow and difficult to access. Now, using security tokens as a medium, it becomes possible to offer the liquidity needed to transfer things like gained interests in a faster, more cost-efficient way. This in turn unlocks greater value and accessibility for those holding fractional shares. Fractional ownership of real estate, for example, will enable investors who are new to the market to participate with both lower entry requirements and risk exposure.
Security tokens in fractional ownership represent ownership of a portion of an asset put onto a distributed ledger, functioning similarly to an investment contract.This type of token offers multiple benefits from lower costs and fees, to increased efficiency, transparency and more.
Security tokens are set to continue gaining prominence and potential- new and varying use cases are contributing to the overall popularity with both institutional and individual investors. One thing is for sure: we’ve yet to see the full potential of the security token market, but it’s certainly bound to be interesting.