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Security tokens derive their value from an external tradable asset while following the regulations of the concerned federal system. They also guarantee the right of ownership, providing the token holders with the right of profit share, equity, dividends, voting, and more.
When real-world assets are converted into digital assets, the process is known as tokenization. Security tokens differ from utility tokens in a sense that security tokens are asset-backed securities and are fully regulated by the government.
In the US, for an instrument to be defined as a security, it has to pass the regulations of the SEC (Securities and Exchange Commission). The Howey Test is the standard methodology put in place by the U.S. Supreme Court to make that determination.
Howey Test
Presently, for a transaction to be termed as security, it has to fulfill the following four conditions:
- There is an investment of money.
- There is an expectation of profits.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
Security tokens: Revolutionizing the market
Security tokens are forging the path for legal fundraising, allowing businesses to raise funds quickly. With the increase in popularity security tokens, the demand for security token trading platform and security exchange platform is also increasing.
Here is how security tokens are ready to disrupt the market.
7 ways to unlock the potential of the market through security tokens
Increases liquidity: Liquidity in the market can be defined as the ability to quickly fulfill buy and sell orders without having a significant effect on the price. Traditional securities take a longer duration to complete the transaction. For example, security is intended to be put on sell on Thursday afternoon, then the transaction will not be settled until the following Monday. Through STO, the transactions can be completed within minutes instead of days, thus eliminating illiquidity.
Opening up capital to global markets: Security tokens allow businesses to attract investors from around the globe to participate in their security token offering (STO). Companies seek global investors as it enhances the opportunities of buying assets and adds up to the liquidity of the security.
24/7 trading: Traditional markets are generally open for a specific time frame, restricting to majorly 6-7 hours on weekdays, excluding weekends and other holidays. This hampers the liquidity of the market as investors or traders are not able to act progressively on the new market developments or any information release.
However, security tokens eliminate this issue and allow round the clock market operability to maintain the efficiency of the market.
Asset interoperability: In a world where nearly any real-world asset can be tokenized, it becomes easy to achieve asset interoperability. It is the ability of software or computer systems to exchange and use information.
Automated compliance: Traditional securities need to adhere to much regulatory compliance. These regulations may vary from asset type to category of the investor or the jurisdiction in which they would fall. But in security tokens, the compliance requirements are reduced. The security tokens only need to be compliant with the exchanges where tokens would be listed.
Programmable assets and securities: The building of an infrastructure that could use the ecosystem lays the foundation for the transaction of tokens. Tokens work within the confined ecosystem of blockchain. Conversion of tokens into the digital infrastructure leads to the process of programmable assets.
Programmable assets offer benefits like:
- Dividend release
- Voting Rights
- Governance Rights
- Special Rights and Privileges
Fractional ownership and increased market depth: The assets which have high-cost volume and limited demand and supply force are more likely to get less number of investors. But if the same asset is being divided into many individuals, then the level of risk would be divided and it would rope in more investors. Same is the case with security tokens where tokenized assets fractionalize the benefits and risks among various owners, thereby attracting more investors from around the globe.
To sum up, security tokens are anticipated to have a dominant position in the crypto market. With the launch of many more security tokens, the need for security token trading platform development will increase. Furthermore, since security tokens are SEC-regulated, the market will witness fewer cases of scams and the businesses will be able to maximize their fundraising opportunities.
