Understanding security tokens and what differentiates these instruments from standard financial securities and utility tokens is a subtle discussion.
Two legal experts, two financial leaders, and a blockchain professional came together to distinguish the unique attributes of security tokens at the Paris BlockchainSummit 2019.
This insightful panel discussion detailed what security tokens are, what makes them unique from other instruments, and the promises of tokenizing securities on blockchain technology. These professionals put security tokens into perspective regarding how they are fitting into the wider macroeconomic markets.
Tokenizing securities on blockchain technology offers some advantages to owning financial securities through traditional institutions. Owning securities through traditional institutions imposes certain limitations on the nature of ownership.The assets can be lent out by institutions and the interest rate compensation which owners receive for depositing assets with institutions has been spiralling lower. Assets tokenized on blockchain technology offer an interesting alternative.
Security tokens can be seen as having similar characteristics as any financial instrument. Legally, this would mean the same requirements apply to security tokens as financial instruments. Most regulators are currently viewing security tokens in this manner. Further discussion is warranted regarding whether this extent of regulation should apply to security tokens or whether security tokens are worthy of different regulatory measures.
Security tokens give rise to many interesting opportunities. The ability to finance virtually any project by tokenizing it disrupts the equity model as we know it today. Investors can expose themselves to private projects without the enormous capital requirements which are typically prerequisite to investing in the private market. The divisibility of tokens also means that investors can purchase ownership in small fractions of a project and easily transfer their ownership.
Currently, banks and large corporations are not yet ready to adopt the infrastructure necessary for widespread use of security tokens. Currently, there is limited infrastructure to facilitate sales negotiations for this type of token and only a small number of investors are participating in the infrastructure which does exist. Furthermore, there is still some uncertainty and restrictions regarding regulatory frameworks for this new type of asset. For example, in Germany, security tokens can be purchased but they cannot be traded. The adoption process will have progressively less friction as more businesses implement infrastructure, more investors participate in the market, and regulatory frameworks for this asset class advance.