Security tokens have disrupted the cryptocurrency ecosystem. The burgeoning popularity of security token offerings (STOs) has increased the demand for STO exchanges; myriad businesses and individuals are building their STO exchange platform to benefit from the rising popularity of STO.
If you are new to the crypto world, or probably if you are not active in the STO market, specifically, you may have various questions regarding what is tokenization or STO. In this article, we’ve discussed securities, tokenized securities and security token exchanges, to help you comprehend the STO ecosystem.
What are Securities?
According to Investopedia – “The term “security” is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation—via stock—a creditor relationship with a governmental body or a corporation—represented by owning that entity’s bond—or rights to ownership as represented by an option.”
Securities may include, but are not limited to:
Stocks: Embodies part ownership of a public company
Options: Representation of rights to ownership
Bonds: Debt financing, issued by organizations such as governments, state, and municipalities but also by private organizations
Exchange-Traded Funds (ETFs)
Real Estate Investment Trusts (REITs)
Index funds
Why do investors buy securities?
There are mainly two reasons as to why an investor would buy securities.
Investors expect that the value of the security will generate profit once it is sold.
Investors are interested in the rights as the security provides them access to dividend payouts, interest, and appreciated sale at maturity (bonds) or voting rights.
Fungibility and negotiability are two key attributes of STO. The fungible assets are interchangeable with other individual goods or assets, making the exchange and trade processes even simpler. On the other hand, a ‘security’ is a financial tool that is backed by tangible real-world asset class such as the revenue or operating profit of a company. Hence, showing the ownership information of the product into which the investors put their money.
The Advantages of Tokenizing Securities
Security tokens are mostly similar to traditional securities, but there’s one difference, i.e. the tokenization of these assets. This is intriguing because the technological upgrade that Blockchain technology can bring will improve the dynamics of the traditional securities, shifting the outdated infrastructure of this industry to a higher level. The benefits of tokenizing securities include:
Programmability of securities (automated dividend payouts, integrated voting protocols, regulatory compliances like reporting, KYC and AML procedures)
Augmented transferability of ownership
Interoperability of unrelated securities
Round the clock security trading
Drastic cost reductions due to the removal of the middlemen
Fractionalization of securities and the assets they represent
Major boost of the addressable (global) investor pool
Immutable transparency
Different types of Tokens
Utility tokens:
They represent access to a company’s product and services provided by the network. These are designed as purchases, not as investments.
Payment tokens:
Also known as transactional cryptocurrencies, payment tokens are based on Blockchain, which act as a digital currency that is created as an alternative to traditional currencies for making financial transactions.
Security Tokens
Security Tokens are similar to traditional securities that include stocks, bonds, and options. Also, they come with a strong technological upgrade, providing them the potential to transform the financial industry.
What is an STO Exchange Platform?
As the traditional securities are bound to upgrade technologically, so is the infrastructure for the exchange of these assets. Securities can be bought and sold through:
Brokerage houses
Directly from the issuing company
Banks
Peer-to-peer
A security token exchange is a platform that facilitates buying and selling of security tokens for the investors. For this an entirely new technological infrastructure is required, however, they are still bound to the rules and regulations of a traditional platform.
Since an STO exchange platform is being built from scratch, it can tackle all the problems of a traditional platform in its architecture. Even though security token exchanges are bound by jurisdictions, Blockchain technology and tokens have strong global appeal. With enhanced regulatory frameworks, these exchanges can open up investment options for a huge audience.
As the underlying infrastructure is Blockchain, the ownership of the tokens is embedded in the token itself, making the transferability even more secure and instant, which is something traditional security trading organizations cannot provide.
The most promising benefit of a security token is the programmability of securities. For an STO exchange platform, a lot of services currently provided by the middlemen (underwriting, regulatory compliance, KYC and AML obligations, insurances and security) can be automated and provided through smart contracts and Blockchain technology.
To sum up, the increase in popularity of security tokens has led to an indispensable need for a security token exchange platform to trade these tokens.