Security tokens have been spoken about for some time as one of the best potential uses cases for cryptocurrencies. Now, we’re finally seeing some arrive on the market having overcome the hurdles of an inconsistent regulatory system. But, what exactly are security tokens and why are they so highly thought of? Our introduction should guide you through what you need to know.
Definition of a Security Token
In simple terms, a security token is a cryptocurrency version of a stock, bond, or any asset that is expected to increase in value, and is sold to investors as such. For example, token-issuing crypto hedge funds sell their coins as securities, with the expectation that the fund will perform well and the value of the token will rise, whereas regular tokens are, or should be, sold as speculative investments. Security tokens are regulated in the same way as regular securities to ensure that investors are not drawn into fraudulent operations. This means they must pass the Howey test in order to be classified as securities and regulated as such by authorities like the US Securities and Exchange Commission.
STO vs ICO
Security Token Offerings (STOs) are like Initial Coin Offerings (ICOs), except the intention behind them is, in theory, different. Most ICOs are sold as utility tokens that will allow the holder to utilize features of the company’s platform once it has launched, allowing them to circumnavigate securities laws. STOs on the other hand allow the purchaser the chance to invest in a scheme that is purely designed to make money, so it’s easy to see why they need to be regulated. Examples of fraudulent securities tokens include BitConnect, which promised investors a regular return on their investment, but was instead a Ponzi-style scam where money was taken from one person to pay back another.
Security tokens are only regulated where purpose-made securities laws exist, such as the US, which is why some aspects of cryptocurrency, such as ICOs and leverage trading, are not extended to these countries. In other countries, such as the UK for example, there are no securities laws, so securities tokens are treated in the same way as all other cryptocurrencies.
What’s all the Fuss About?
Securitization of assets on the blockchain is the area that has many hot under the collar. This is simply the act of splitting up the value of an asset and dividing it by a set number of tokens. These tokens are then auctioned off to bidders who will then own a percentage of that asset. When the asset is sold on, a smart contract will immediately split the money between all the token holders who, hopefully, have made a profit.
We have already seen examples with this, with an Andy Warhol painting and a $30 million Manhattan property being tokenized and sold on the blockchain in 2018. As security tokens and the blockchain sphere evolve, this kind of securitization will become more and more popular.
The Future is Tokenized
Security tokens have been awhile in coming due to regulatory issues, but they are starting to arrive, and they present great opportunities in a variety of fields, from asset ownership to hedge fund investment and beyond. In ten years, auction houses will be full of tokenized property, art, copyrights, patents, and more – the question is, will they accept Bitcoin?