Opportunities Await – Thanks to Security Tokens and STOs

28 August 2019

Discover why legislation in 2019 towards security tokens and STOs are pushing the blockchain industry towards a whole new world of opportunities

Before discussing the future of security tokens and the differences between them and other forms of tokens, first, let’s cover what they are.

In layman’s terms, a security token is portable devices that authenticate a user’s identity via electronic means by simply storing their relevant information.

In the same way that shares and stocks work, security tokens represent complete or fractional ownership interests. This can involve anything from start-up businesses and public companies to real estate and intellectual property.

Security tokens also enable users to store cryptographic keys, as well as apply time-sensitive passwords and biometrics to make shared data more secured.

The question is, why are they giving our society a unique opportunity to flourish in the next decade?

What’s the difference between security, utility and payment tokens?

The features and purpose of a security token shouldn’t be mistaken with utility and payment tokens. The main difference between the former (utility tokens), is that they represent access to a network and allow investors to buy goods or services from it.

An easy way to distinguish security tokens and utility tokens is to follow the Howey test. To be classed as a utility token, the answer must be “yes” to one of the following questions:

  1. Is the token being sold as an investment?
  2. Is there a person upon whom investors rely?

In contrast, payment tokens have their own blockchain and are regarded as a means of payment. In other words, they’re a form of cryptocurrency like bitcoin and ethereum.

While cryptocurrency/payment tokens are continuing to rise in popularity across the world, its volatile nature is currently stopping it from taking competing with fiat currency like the US dollar or British pound.

This is just one of many reasons why experts are naming security tokens as the future of blockchain technology.

The key is in security token offerings (STOs)

An STO strikes a balance between an initial public offering (IPO) and initial coin offering (ICO). It allows users to raise money through a regulated token, with the details of ownership recorded on a blockchain.

The issue with IPOs for shares is that they carry strict regulations imposed by governments, force start-ups to forfeit control/ownership in the company, are widely regarded as an expensive process and are exclusive for accredited investors only.

ICOs are associated with utility tokens and don’t have any real regulatory framework or legal protocol. As you can imagine, the lack of stipulations makes them subject to countless cases of fraudulent activity.

Fundraising security tokens backed by real-life assets via an STO means investors have added peace of mind that the centralised and decentralised nature of these tokens is regulated via know your customer (KYC) and anti-money laundering (AML) verifications.

In 2018 several countries introduced compliant security token issuances, such as Liechtenstein, Germany, Switzerland, Estonia and Malta. The London Stock Exchange even publicly claimed that it’ll be offering security tokens at some point.

On top of this, all procedures of an STO are transparently logged onto the blockchain database and can be monitored by everyone – creating security in the entire ecosystem.

And not to mention the market’s 24/7 functionality and benefit of fractional ownership, illiquid and exotic asset-classes enticing new investors in too.

The underlining point is that security tokens and STOs deliver the transparency of an IPO centralised system and the innovation of the decentralised ICO one.

As more countries in the EU and the rest of the world continue to develop the frameworks for security tokens, there’s no doubt that businesses will thrive from the blockchain industry as it evolves into a smarter and safer environment.

This article was originally published in “Blockchain Compliance Bulletin”, number 8. Cover image: © knssr/AdobeStock.

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