A security token typically reflects a stake in a resource or an outside company. Technically, a token is considered a security token if it is governed by federal law and gets its value from outside marketable assets or businesses.
Security tokens may be released by organizations or governments. These tokens, therefore, have similar functions to stocks or bonds. Because they represent the right of ownership to an asset, security tokens differ from utility tokens, for instance.
They are essentially liquid digital contracts that represent shares in valuable assets like company stock, property, or automobiles. Ownership interests are retained on a public ledger by employing security tokens (blockchain).
Startups doing initial coin offers (ICOs) and initial exchange offerings (IEOs) can increase the liquidity of their assets and draw in additional investors by tokenizing securities. Other advantages include decreased issuance fees, high market efficiency, fractional ownership, and easier access to digitalized versions of real-world assets.
Security Token Utilization
Security tokens have made it possible for startups and businesses to issue shares to their investors. Security tokens have zero downtime, are transparent, and may be divided because they are created on blockchains.
Despite participant anonymity, public ledgers provide for transparency of transactions. As a result, everything is accessible on the public ledger and can always be audited. Anyone can view the smart contracts that control tokens, holdings, and issuances.
Investors who find the tokenized scheme more alluring and accessible can be offered extremely valuable assets like art and real estate. A sculpture worth $8 million, for instance, might be tokenized into 8,000 parts and sold for $1,000 each. Assets are made more accessible by being tokenized and made divisible.
Quick to Settle
When transferring assets, settlement, and clearance typically take a lengthy time. Processes, however, are automated on a blockchain. As a result, changing ownership can be done fairly immediately.
Most financial markets have a set timeframe for conducting business. Typically, they are open during the week and closed on the weekends. However, digital asset markets are always accessible and have no downtime.
Security Token Types
There are several types of security tokens you should know about if you’re interested in launching a security token offering.
An equity token denotes possession of an underlying asset, such as stock in a corporation. A token holder of stock may be qualified for dividends, voting privileges, or both. Similar to shares, a contract specifies the terms and circumstances that apply to such.
Debt tokens are interest-bearing tokens. They are comparable to the interest rate or short-term loan on the sum lent to an individual or business. They stand in for the debt the token owner owes. Debt tokens come in two varieties: those that represent debts with stable interest rates and those that indicate debts with variable interest rates.
Asset-backed tokens are blockchain-based tokens that are backed by actual assets. Real estate, stock in a firm, commodities, and even diamonds are examples of these assets. They grant users ownership rights over priceless things, whether they are ethereal, material, or digital.
A utility token aids in the funding and capital-raising efforts of businesses, startups, and project development teams for the creation of blockchain initiatives. These tokens may later be used to buy products or services from the cryptocurrency’s creator.
Definition of Security Token Offering
It is estimated that STO issuances will increase globally and that the total STO AUM will exceed $10B USD. Security tokens are sold on security token exchanges during a security token offering or STO. STOs are a sort of public offering that makes it easier to trade financial assets using digital securities that have been tokenized. Token transactions are recorded and verified via a blockchain or public ledger.
Initial coin offerings, which are vulnerable to fraud, are thought to be a less safe option than STOs. Token holders have secure and legal investment alternatives thanks to STOs, which are also governed by laws and regulations because tokens are considered securities.
How STO Works
Security tokens give entrepreneurs the ability to generate funds for cryptocurrency projects and new business initiatives, much like ICOs do. Other methods of raising funds, such as STOs, quickly gained popularity as a result of the challenges and restrictions involved with obtaining funding through conventional venture capitalists. STOs are a safe way for businesses to obtain much-needed cash because they are legal and regulated.
Crypto-fractionalization, which secures existing assets in the real world through tokenization or securitization, is another use for security tokens. While the overall market capitalization of the globe is projected to be $91 trillion, the value of global real estate assets is around $326.5 trillion. These assets can technically be tokenized.
In addition to lowering administration costs, tokenization makes it simpler to trade securities. Once securitization is used in equity markets, paperwork will also be considerably reduced or eliminated.
The following security assets are often represented by security tokens:
- Real estate: Equity in real estate is convertible into security tokens, just like real estate investment trusts (REITs) are.
- Capital markets: Companies might tokenize their shares to grant voting rights, dividends, or both to token holders.
- Commodities: Commodities may also be divided into tokens and subsequently sold during an STO.
- Equity Funds: Equity funds have the option of tokenizing their shares, in which case token owners would be entitled to a share of the fund’s earnings.
It’s crucial to keep in mind that security token offerings theoretically offer the same assets as those offered on conventional investment platforms. These underlying securities are unchanged by tokenization. STOs only offer a fresh method of approaching assets.
STOs are thought to be safer and involve less risk than ICOs. This is due to the strict enforcement of rules regarding STOs. A potential investor can more easily determine if a security token is priced fairly or not because it is technically tied to a real-world asset in addition to its present market worth.
STOs are also less expensive than other types of financing, such as IPOs. Smart contracts eliminate the need for pricey legal representation. Meanwhile, the blockchain also gets rid of conventional paperwork and dependencies, substantially cutting down on processing time.
However, creating an NFT smart contract audit or any type of audit needed for launching your security token offering is not easy. It requires industry knowledge and specific technical skills, so keep in mind that you might also need to hire professionals outside your organization.