Learn about Security Tokens and STOs
Blog Article Series
Regulators may require securities to tokenize in the future!
A security token is a digital token on the blockchain that represents a security as defined by the regulation of your jurisdiction. A security token can represent various kinds of securities, including stocks, bonds, dividend-paying assets, or investment contracts with security-like properties, i.e., regular payment of dividends, revenue sharing, profit sharing, etc.

Your jurisdiction determines whether your token is a utility or a security. In the US, almost all tokens are currently assumed to be securities due to statements from the SEC that any token purchased with the goal of later deriving financial benefit would be viewed as a security by them. This includes all (or almost all) of tokens that are currently issued for fund-raising purposes in the US.

In Europa and Asia it currently looks as legislation will leave significant room for both utility tokens and security tokens although there is much difference from country to country. Some have no legislation, some are starting to get it in place and a few have passed laws indicating how to classify tokens.

From our viewpoints security tokens (or tokenized securities) are useful for two main purposes:

(1) As a fund-raising mechanism. You can issue security tokens to raise funding for a commercial project. The tokens can be designed to attract and reward investors.
(2) As a means of increasing liquidity and enabling fractional ownership in an existing security or asset (tokenizing of securities and assets)

And keep in mind, security tokens can have utility properties as well (hybrid tokens) - and you can design your business with a dual token structure (security token for investors + utility token for platform token network effect).
All experts agree that the global securities market will move to the blockchain over the next 10 years to constitute a $10 trillion market.
If all real-estate and pre-ICO / IPO equity is tokenized this is not unlikely considering that the global stock market is $80 trillion.
Consider further that the global derivatives market is $542 trillion.
A security token is the ultimate financial derivative.
STO vs ICO
Security Token Offering compared to Standard Initial Coin Offering
ICO
  • Potential Non-Compliance
  • Only utility (barriers and limited business models)
  • Plenty of secondary trading
  • Small/private investors may participate
  • Not interesting for institutional investors
  • Less expensive
  • Uncertain upside for investors
$400
Appropriate when investors are predominantly found in the user community
STO vs IPO
Security Token Offering compared to Old-Fashioned Initial Public Offering
STO
  • 24/7 markets
  • Fractional ownership (better price discovery and market efficiency)
  • Rapid settlement (minutes)
  • Longer term cost reduction (automation, smart contracts)
  • Higher liquidity (liquidity premium leads to increased price)
  • Automated compliance (cross jurisdiction, KYC/AML)
  • New properties, functions, designs, ...
$400
Perhaps the question is not whether a token offering should be deemed a security, but whether all securities should be tokenized?