Better safe than sorry: security tokens offer safety as well as a source of untapped potential
Previously, we covered the essentials about security tokens, plus the reasons why investors, regulators, and startups are embracing them. This time, we are focusing on the benefits of these security-based tokens, as well as drawing up a vision of how they can redefine the way we think about big bank operations.
Disruptions in the financial market are imminent, so it is crucial you familiarise yourself with the latest trends. As way of making the concept of security tokens easier to understand, we have put together a number of points outlining why this type of token represents a sound investment of the future.
Protection against legal issues
Crypto markets are still operating in ill-defined legal grey zones. Therefore you have to be aware of the legal landscape in order to avoid civil and criminal liabilities. To gauge the risks, take note of how how tokens are viewed by authorities.
For tokens that are intended to be used only as digital coupons (utility tokens) there is almost no regulation. However, there are strict standards set for tokens designed as investments (security tokens). From a regulatory point of view, utility tokens are the equivalent to video game coins, meanwhile, security tokens are tradable financial assets (securities).
To decide which is which, tokens are judged by whether they are desirable based on buyers anticipating future profits due to price appreciation, or because they have a specific use-value. Currently, many ICOs (Initial Coin Offerings) still issue tokens that are structured to be used in exchange for some specific service. This makes them utility tokens. However, is tough to come across a properly designed utility token, or one without any investment properties.
One of the most pressing truths of the crypto world is that despite the well-meant wishes of the token’s developers, most token buyers are holding utility tokens as an investment, and NOT for personal use.
The regulatory tripwire lies in the philosophy of “substance over form”. Watchdogs look at the way tokens are actually being used, rather than their intended use. Thus, if a company issues utility tokens that are later found to be used as securities, the decision could wreak havoc.
Issuing unregistered securities is a serious violation that involves not only monetary fines, but also prison time for the issuer. Secondary trading markets, which facilitate token transactions, can also be penalised for failing to register as a legal exchange.
“Security Tokens, on the other hand, are compliant with regulations from the outset. They provide legal certainty in this not-always-certain market.”
You might think the problem lies with the current regulatory system, but I assure you, it does not. If this wasn’t the case, a potential legal loophole could be opened to exploit securities laws by incorporating a trivial utility into the token — for example, tokenized stocks and shares could escape regulation just by implementing a feature to exchange your token for a clip of panda rolling down the hill. Really.
Security Tokens on the other hand, are compliant with regulations from the outset. They provide its holder legal certainty in this not-always-certain market.
Stronger buyer protection
Very closely linked to the previous point, security tokens represent a sounder investment because they inherit a generations worth of refined securities laws that protect the buyers.
The ultimate goal of any regulator is to guard ordinary investors from being cheated or scammed. Compliance requirements, such as disclosures, clarify the rights and expectations of the buyer, as well as the duties and obligations of the issuer. Rules ensure that the issuer is not able to defraud investors from money. Furthermore, this regulation provides legal rights against fraudulent activities, market manipulation, misrepresentation of the product, insider trading, and much more.
Also, unlike utility tokens, security tokens are backed by actual tradable assets. This makes them better isolated from general shocks in the crypto market because their value is not derived from Bitcoin and other cryptocurrencies.
Opportunity to reimagine Wall Street
DESICO is the world’s first platform that will allow the issuance and trade of security tokens in full compliance with the law. Its CEO and co-founder, Laimonas Noreika, believes that security tokens will actually allow for a redefinition of Wall Street and traditional financial systems.
“Security tokens definitely have the potential to re-imagine Wall Street, and this is evident in that Nasdaq is preparing for tokenization thanks to the transparency, liquidity and automation that it brings to the market,” he explained. “Beyond crypto language, the concept of a security token is very easy to understand. They are purely a fraction of any financial asset with a whole wealth of potential for innovation — for example, a security token allows a business to tokenize traditional financial assets such as a shares of revenue rights that have been historically difficult to trade. They also allow for the tokenization of non-traditional assets such as real estate or art, which are illiquid and often extremely difficult to own as a whole.”
Tokenization also allows for a bundled asset to be separated into multiple layers of value. Whether it’s a right to ownership, voting, or future profits, each layer can be separated and then repackaged in token form. In theory, such a tokenized world would allow you to own a fraction of a French impressionist masterpiece, then trade that for voting rights to a company you want to influence but not receive profits from, and then trade those for royalty rights to an AC/DC album.
“Tokenization also allows for a bundled asset to be separated into multiple layers of value.”
Furthermore, security tokens can be easily transferred with from one token holder to another, and the newly facilitated secondary trading markets will greatly improve the liquidity of them. Tokenization also means more flexible and fluid financial assets, because issuers have automated record-keeping, compliance and much more, while the antiquated financial system continues to promise investments stuck in centralized depositories.
If you dedicate your time to building a revolutionary crypto business, wouldn’t you want to be sure that your ICO is not a ticking legal time bomb?
If you invest in tokens, wouldn’t you want to be protected against fraudulent activities and organizational wrongdoings?
Then security tokens represent the way forward. Better safe than sorry.