What are Security Tokens?
If you’re having a hard time understanding why blockchain and decentralized transactions are paramount to the future of finance, give this a read. Not only will blockchain revolutionize the banking industry, but it will create a digital ledger where transactions in cryptocurrency (i.e. Bitcoin, Ethereum, etc.) are stored in chronological order on a public domain.
Blockchain allows for the creation of cryptocurrencies, aka tokens, which have three primary functions:
1. Payment Tokens—used as a form of currency or payment such as:
- Recurring subscriptions
- Apple Pay/Android Pay
2. Utility Tokens—used to allow access to a service or application such as:
- Permission to use a private network
- Right to vote on an issue or proposal
3. Security Tokens—used as a digital asset which falls under federal security regulations such as:
- These tokens represent a security or financial interest such as ownership in company stock.
- If you can own it, you can tokenize it.
Since we’re talking about security tokens specifically, let’s break that definition down a little further. Simply put, a security token is essentially the ability to tokenize an asset. The value of the token is determined by the item it represents—in this case, the value of the company you own stock in.
There are many benefits to tokenizing private securities. As the game stands today, an investor’s portfolio is comprised of ownership in many different companies for which they most likely paid cash. The gains on those investments have yet to be realized because there is no easy and secure way to sell these securities.
They’re locked into that investment for an indefinite amount of time with no concrete way to visualize how it’s performing. Company cap tables are unreliable and often not kept up to date. Not to mention, the CEO is busy and probably forgot to send the last few investor updates.
This brings us to the heart of the matter. Why should companies tokenize their securities?
Cap Table Manages Themselves
Ready for a bold-faced lie you’ve been living with? Cap tables don’t have to be managed.
Oh, you’ve been paying crazy money to manage your cap table? Well, stop.
Cap tables are a record of transactions, so if you process those transactions on say the blockchain and issue tokens—Boom! Cap tables are easily and securely done.
This isn’t a Trend
If anything, this market is going to continue to grow. Many leading experts predict that a significant shift from utility tokens to security tokens will take place in 2018. Why? Primarily due to compliance and regulations. While initially, companies were hesitant to offer tokenized securities due to concerns over violating SEC regulations, those apprehensions are rapidly dissipating.
The future of securitized tokens is on the rise as we start to see regulation-compliant platforms like Venture360 provide the tools necessary to make security tokens a legitimate alternative.
Each and every transfer done on a platform using tokenized securities must go through a ledger on the blockchain. This means that all transactions are documented and visible to anyone with approved access. Now, both the company and the investor have real-time access to the same information. This is undisputed, entirely accurate information. All the time. That’s huge.
- You know what’s fun? Investing in really cool technology at the early stages.
- You know what isn’t fun? Not being able to access money when you want.
In fact, this one simple word liquidity represents the #1 reason less than 1% of accredited investors are actually investing in private companies. Tying up money for 7–10 years just isn’t that appealing.
But what if companies could build their own, privately controlled markets with tokenized assets? Well, we are stealing our own thunder a bit now.
- The most important thing a company needs to consider in tokenizing securities is controlled distribution.
We all want to have our cake and eat it, too. This is why Venture360 built controls into our tokenization platform, allowing companies to tokenize their securities. Issuers control the subsequent distribution of these tokens in privately controlled markets.”
We go into exactly how all of this works in later posts, and we are always open to suggestions about how you would build your own market.
Well, what are you waiting for? Ready to be part of the revolution?