One of the main reasons is that tokenised securities cut out the middleman and open up the market for more efficient and global transactions. Tokenised securities are are a blockchain based representation of value that under securities law is subject to regulation.
The Blockchain has enabled:
- Cryptocurrencies which is programmable or digital money
- Utility tokens which enables a way where an ecosystems users can interact with products or services which are structured to incentivise participation
- Security tokens are basically tokens programmed with ownership
Tokens by their nature are fractionalised representations of ownership.
Fractionalisation started long ago with the Dutch East India Company where there was a need to fractionalise high value single assets like an overseas journey to the East Indies.
To get a better understanding of them here is a list of features that give a good solid overview wha Security Tokens are, how they can be used and why they are so great.
- Exposure to a larger and global investor base
- No Manipulation by Financial Institutions
- 24/7 markets so it is around the clock trading and it is not just one time zone involved
- Faster deal execution as settlement is instant or fast in most cases. Execution may be fast and easy with normal securities but settlement can take a few days.
- Direct costs are reduced as normally capitalisation tables and share registries are costly to maintain where as tokens are reconciled in real time.
- Liquidity is increased as normally private assets are illiquid
- Compliance is automated as regulatory algorithms can be built in and the process is frictionless
Each jurisdiction has its own regulatory structure but if we look at the U.S, it gives us a good idea of how Security Tokens are seen. The sale of securities must be registered with the SEC or use an exemption from registration under the Securities Act of 1933. Within thee regulations there are three ways Security Tokens can be marketed.
- Regulation D 506(c): which permits the sale of securities to accredited investors only, but with no raise ceiling so a 506(c) offering can raise as much capital as the company likes to the degree that investors are willing to buy.
- Regulation Crowdfunding: which permits the sale of securities to accredited and non-accredited investors with an annual cap of $1.07M. The differences between Regulation A+ and Regulation CF aren’t relevant to the discussion of tokenisation and are largely differences in issuer burdens (i.e. Regulation A+ has more intensive paperwork and auditing before an issuer can sell securities).
- Regulation A+: which permits the sale of securities to accredited and non-accredited investors, but with an annual cap of $50M.
This brief overview shows that Security Tokens are here to stay and besides pathways for marketing there are a list of features that highlight why thee is no turning back the clock.