The Future of Security Tokens: An Outlook From The Present
Security tokens are taking the financial world by storm, and it’s no surprise that investors are taking notice. The future of the security token industry is estimated to reach a staggering valuation of $10 trillion by 2020 with current advancements. Over the next few years, the majority of private placement sales will be facilitated by blockchain technology via security tokens, adding to this estimated value. The future of the industry seems full of possibility for adoption, with big investment giants such as Merrill Lynch, JP Morgan and many other companies starting to move onto the blockchain and create their own STO model.
STO Industry experts believe that security tokens will replace the financial architecture of Wall Street and become the new foundation of world investment and security transactions. The security tokens industry will be differentiated into these 3 categories:
- Debt Token Offerings
Security tokens which are based on debt are representative of debt instruments like real estate mortgages, corporate bonds or other assets dealing with lending and borrowing. The prices of these tokens are then established by factors such as risks and dividends, and how it is applied. The smart contracts representing a debt security token in this situation will include specific repayment terms dictating the dividends token holders are eligible to receive, but also weighing the different risk factors which could impact the project. The fractionalization of debt is one of the biggest advantages this type of offering brings, granting unique opportunities to a bigger scope of investors overall with the potential to earn regular dividends.
Typically, smart contracts representing debt security tokens should include the repayment terms that dictate the dividend model but also consider the different risk factors of the underlying debt and its influence on the offering.
- Tokenized Asset Offerings
Tokenized Asset Offerings are the most commonly thought of versions of security tokens, and the most prominently covered in the media.These kinds of offerings provide efficient transfer of real world assets in a digital way, with no need for intermediaries or third parties to manage the transaction. Tokenized assets come with many advantages for the process of purchasing and selling securities, such as liquidity premiums and lower costs to name only a few.
Liquidity is strongly associated with the trading volume of an asset, and affects the asset price, in turn influencing the value of the token for token holders.
Tokenization creates a digital environment for these assets and removes the need for intermediaries and costly third-parties from the representation of token ownership, decreasing issuance costs significantly.
- Equity Token Offerings
Equity token offerings are another type of offering, a combined investment model with advantages similar in nature to IPO’s and VC rounds. These tokens provide digitized equity-like rights for both investors and issuers.
ETO’s are cost-saving as banks and financial institutions do not participate in the whole process, which is more peer-to-peer. Instead, the purchase and sale transactions are done between issuers and investors directly. The tokenization of equities is both more cost effective as well as time efficient for issuer and investor groups.
This process also enables easier acquisition of shares for investors, with less legal formalities to complete.
Security tokens are expected to become a pillar of digital security services of the future due to recent technological advancements and transparency. Industry experts predict multiple versions of the security token model to become prominent in the future financial and investment market landscape. New advancements such as open distributed ledger environments excluding intermediaries and offering other benefits will link issuers to investors more easily than ever before, contributing to popularity and adoption. Key to furthering these developments will be creating interoperability of the technology with other digital asset classes and existing systems in order to attract more widespread interest.
Stakeholders in the security value chain will need to cooperate and recognize these tokens as the future and implement them accordingly.
The future of the STO industry seems full of possibilities, with a predicted valuation of $10 trillion by the end of next year. Industry experts believe that security tokens will replace the financial architecture of Wall Street and facilitate world investments between issuers and investors more directly. Debt tokens, asset-backed tokens and equity tokens are the three emerging categories which will see further development in the future.
Key to these developments will be the interoperability of the technology with other digital asset classes and technologies of the present, and the next five years.