Security Tokens are the regulated financial securities creating a buzz in the emerging crypto landscape. With the arrival of security token offerings, this sector has begun to reach an uncharted level of legitimacy in the financial space. Such is the popularity of STO in the crypto arena that some experts have prognosticated that security tokens would become a multi-trillion dollar market in the coming decade.
With regulatory bodies such as SEC (USA) and SEBI (IND) coming down hard on initial token offerings, security token offerings represent a worthy alternate financial innovation. Stalwarts like Coinbase and Nasdaq are reportedly making a foray into the STO world to bring disruption in this market. Following their footsteps, many other businesses are adopting this new groundbreaking way of crowdfunding for their business venture. Below, we have outlined some key reasons that prove the credibility of STO and make them an exciting proposition.
Unlike utility tokens, security tokens depict the underlying interest in equity or debt position, dividends, profit sharing, voting rights and other benefits that their holders can reap. These tokens represent a legal right to ownership of the intrinsic value of the issuing organization. They offer considerably greater value to the token holders, while potentially mitigating the volatility risk. Notably, there are ample ways like dividend discount model, residual income method, discounted cash flow etc, which are widely accepted to calculate the intrinsic value of a security. In brief, security token has an intrinsic value, denoting that it is already worth something, based on the value given to the holder, vis-à-vis the issuing company, in spite of potential future value which may be assigned to the token.
Furthermore, security tokens are intended as investments as they provide more rights, processes, corporate governance, code of conduct etc. Recently completed and successful security token offerings include tZERO, which is a security token for an investment-based project that pays ten percent of the organization’s profit to the token holders. It is the highest grossing STO sale, raising a massive capital of $134M.
Security token offerings allow the investors to gain the information about the issuing company on a fully diluted basis – with full visibility of all the tokens that have been issued, promised or otherwise encumbered.
STO coupled with blockchain technology provides an immutable and transparent framework, allowing the issuers to accomplish the aforementioned goals. This provides a powerful point of consideration to someone attempting to get a strong position on the current scenario of the situation, as it is directly in line with the regulators’ agendas.
STOs compliant with security regulations are certainly more striking to potential investors due to an enhanced level of efficiency, transparency and indemnity for parties involved in the transaction.
Initial Coin Offerings inevitably dominated the crypto sphere in 2017. However, regulatory bodies view many utility tokens securities which brought forth a slew of reporting and compliance issues that these organizations were unable to fulfil.
There have been plenty of legal actions taken by the Security Exchange Commission (SEC) deemed to be securities. However, no such issues exist in STOs since companies list their tokens as securities from the very beginning.
By achieving compliance with regulatory bodies early on, the businesses can reap the benefits of the tokenized securities ecosystem and stay ahead of the competitors with successful security token offering development.
Almost every cryptocurrency enthusiast is acquainted with the apprehension of losing access to wallets holding digital assets. The dearth of fund recovery features is one of the basic impediments of digital assets in the investment arena.
Well-structured security token offerings come with a robust reissuance feature. However, jurisprudence for execution of benefits like these is subject to suitable checks, balances and confirmations. This provision is another example of how STO models enable regulatory compliance.
Security token platform development places emphasis on KYC and AML protocols. Along with these reporting and compliance burden, security token offerings require a robust audit trail.
While it is comparatively effortless to comply with anti-money laundering in traditional exchange environment where funds are already in the banking system, it is quite cumbersome on a distributed ledger where wallet addresses are anonymous. AML coupling with security tokens allows businesses to track transactions and ensure they are complying with regulations, which further enable them to make calculated business decisions.
KYC/AML regulations create a higher success rate of legal enforcement, thus mitigating the risk for the issuer. With proper security token platform development integrated with the regulations, tokens boost the confidence level of the issuer during the initial offering period as well as post-offering when tokens have become completely tradable.
At one fell swoop, security token offerings provide the mandatory regulatory compliance that can bring forth a bustling digital asset trading landscape. It has been reported that security token offerings have successfully raked in $380M till now. Hence, the long-term trend of STO is clear. We can hope that security tokens will be more embraced in the coming years and tons of capital from wall street will flow towards this market.
It will be interesting to see what STO will bring to the table in future!