Blockchain is undoubtedly one of the most promising technologies supporting several crypto assets such as Bitcoin, Ether, utility tokens, and security tokens. The crypto assets have a phenomenal potential to bring about a great transformation to the entire financial services marketplace. The users are familiar with the other crypto assets except for security tokens since it is relatively a new concept. Thus, it becomes extremely important for the users to understand what security token offering is, its types, how it is beneficial, its best platform, and many more. To make it easier for the users to understand, here we have discussed in detail the security tokens.
Concept of Security Token Offering
A security token refers to a unique token offered on either a permissioned or permissionless blockchain. The token represents a stake in an external asset or enterprise. Different entities such as government and businesses can issue security tokens that would be serving the same purpose like bonds, stocks, and other equities. With the emergence of Bitcoin in the year 2009, blockchain became mainstream. Although cryptos and other financing concepts related to blockchain were referred to as highly speculative as well as volatile, there is still a wide consensus about the value of blockchain technology along with other different forms of distributed ledger technology in finance.
Several large and reputed banking as well as technology giants like Square, JP Morgan, and Facebook have already stepped into the blockchain space. We expect to see more and more names entering into the space in the time to come. It is because of the fact that blockchain has an ever-growing role to play in the payment systems including stablecoins through tokenization of assets via security token offerings.
Types of Security Token Offering
Now, let us understand the four different types of security token offering to gain a better grasp of the concept.
1. Equity Tokens
Equity tokens are similar to traditional stocks with the difference lies in how ownership is recorded and transferred. In the traditional method, tracking of shares is recorded in a database where the ownership of shares is printed and certified on paper certificates. But equity tokens are recorded on an immutable ledger that is kept up to date by a huge network of computers globally. The ones holding equity tokens are eligible for a portion of the profit of the firm and possess the right to vote. Equity tokens are beneficial to the decision-making, regulatory frameworks, and financial outlook of the companies in three major ways.
- Investors are able to participate in voting without violating the securities laws.
- Startups can gain access to new fundraising models that are much more democratized.
- Regulators are able to get a new and much more transparent framework for conveniently evaluating the fundraising of a project.
2. Debt Tokens
Debt tokens represent a short-term loan on an interest rate, in the amount given as a loan by the investors to any firm. The price of a debt token is dominated by ‘risk’ and ‘dividend’. It is because of the fact that a medium risk of default cannot have the same price for a real estate mortgage and a bond for a pre-IPO organization. In a blockchain, a smart contract lives on the network that represents debt security. Within the smart contract, the terms of repayment are included, along with dictating the dividend model as well as the risk factors of the underlying debt.
3. Asset-Backed Tokens
Asset-backed tokens represent ownership of assets, like art, real estate, commodities, or carbon credits. As blockchain is secure, immutable, and transparent, it plays a significant role in enabling a trusted record of transactions. In addition to this, it reduces the chances of fraud and brings about great improvement in the settlement time, thereby becoming a good fit for the commodities trade. These tokens are digital assets with similar characteristics to any commodity like gold, silver, and oil. This, in turn, brings a lot of value to these traded tokens.
4. Utility Tokens
Utility tokens are the ones that provide the users with later access to any product or service. With the help of utility tokens, the companies are able to raise funds for the purpose of the development of blockchain projects.
Advantages of Security Token Offering
Here are some of the major advantages of a security token offering.
Transparency is the prime advantage of a blockchain network. It is because everything is auditable, even the identities of participants. Everyone is able to view the ledger for tracking the holdings and issuance of specific fungible as well as non-fungible tokens.
Tokenization of assets opens up a considerable volume of opportunities for investment for everyone, starting from large hedge funds backed by Wall Street to the retail investors trading on Robin Hood.
All the existing financial marketplaces run as per their schedules and they are available only during business hours for a fixed period since manual effort is required. But on the other hand, a marketplace running on a blockchain network is available 24*7 regardless of the time of day.
· Settlement is Instant
Settlements and clearances have always been a major point of concern for investors looking to transfer assets. Although the trades are performed very quickly, reassigning ownership can take several days. But on a public blockchain ledger, the process is automated, quick, and instantaneous.
· Enhanced Liquidity
Security tokens offerings are much more liquid in terms of ease and convenience of buying or selling in a market, unavailability of an underlying asset, or complexity in buying or selling.
· Cost-Effective in Nature
The issuance of security tokens is aimed at removing middlemen for the purpose of providing simplicity to the investors. Avoidance of middlemen facilitates an easy connection between the investors. This, in turn, provides larger scope to corporations to seek public investments, hence enhancing accountability as well as transparency in the long run.
· Fractional Ownership
Security tokens serve the purpose of a medium for the purpose of mobilizing funds on items that need huge investments. For example, art collectibles costing millions of dollars are limited to only affluent investors. But with the help of security tokens, the value of these collectibles can be conveniently broken down into fractions that can be issued to investors reaching a broader base. The appreciation of the value of these collectibles would accrue to the security token investors. A similar concept is presently being extended to the real estate sector as well and hence has a huge scope since the real estate value in the world has reached about 280.6 trillion dollars.
Top Security Token Offering Platforms
We are now clear with security token offering, its types, and advantages. So, let us dive a bit deeper into the topic to gain knowledge about the top five security token offering platforms.
Polymath is undoubtedly one of the best security token offering or STO platforms in the blockchain community. It is similar to the Coinbase of asset tokenization. The popularity of Coinbase among cryptocurrency newbies is because it provides an intuitive arena where everyday users can conveniently buy and sell digital assets. It is the same hypothesis behind Polymath with only asset tokenization as the main area of focus. Polymath helps simplify the security token offering process and walks business owners through the process of developing and issuing blockchain-based securities.
Moreover, the platform helps the issuing entities to appropriately manage their tokenization journey. It helps in easily complying with legal as well as jurisdictional regulations. Polymath comes with a nifty feature that allows users to reserve their token “ticker” name prior to the beginning of the process of tokenization. While writing, Polymath has about 196 live tokens.
The concept of security token offering platforms might seem to be a difficult one for the ones not familiar with blockchain but it is actually quite simple. Organizations want capital and investors want a piece of the viable organization, typically in the form of equity. Tokenization of assets ties demands with supply in a new and innovative format. But the problem in this regard is how to connect demand with supply. It is precisely the situation where BlockRules comes to the rescue. It acts as an intermediary of sorts that helps launch as well as manage its clients’ tokenization.
Moreover, the organization facilitates the avenue by which investors are able to purchase the mentioned security tokens. It saves a lot of time as well as resources for organizations that are keen on tokenization of assets while providing the investors a feasible alternative beyond the traditional “analog” platforms.
The specter of disruption started to cloud the mainstream banking industry with the innovation in blockchain. In this situation, security token offering platforms like Bankex play a crucial role in actualizing the potential of this technology. Bankex operates under the proposition that all assets would eventually be tokenized, whether those are real estate, stocks, agricultural lands, or others. Therefore, Bankex is establishing itself before the mass transition occurs. The appeal of Bankex lies in its simplicity and sensible approach to the blockchain.
Swarm is considered to be one of the most comprehensive security token offering platforms. Swarm also helps the newbies in the field to quickly tokenize assets very similar to Polymath. It provides an intuitive space for the creation, configuration, fundraising, and issuance of tokens. In addition to this, the platform helps the users with activities after distribution such as redemption of tokens, issuance of dividend governance of assets, investor administration, communications, and reporting.
Swarm’s Earlybird architecture is what helps the platform stand out from others. Prior to spending the time and resources on STO, it is of great importance to know your audience. With Earlybird, the platform helps provide a clear signal of demand before you start, thereby saving you capital as well as headaches.
Security token offering platforms benefit the users in rightly facilitating financial functions which were previously accessible by only the exclusive parties. STO resembles initial public offerings or exchanging equity for capital. Capexmove, in this regard, helps businesses in easily and conveniently issuing debt via blockchain, essentially acting as a bond market. This is immensely beneficial to the business world since Capexmove offers appreciably increased access to lending markets. Moreover, the platform issues digital securities referred to as ERC-20 tokens that are very easily tradable in the secondary markets.
Future of Security Token Offering
The future of security token offerings looks quite bright with the increasing demand for the same. In recent times, there has been a rising demand for security token offering platforms with more and more businesses entering into the blockchain network that includes some well-known brands across the world. Real estate is one of the markets that have a huge scope for security token offering. We have to wait and see what the future has in store for STO.