ST (Security Token) — Securities Token-based Financial Practice
Author: SUN Jiangtao
The recent popularity of ST — Security Token in the industry, has a strong contrast to the current downward capital market and the upset digital currency market. Many industry insiders consider the issuance of ST — STO (Security Token Offering) as legal ICO, and others consider STO as the third wave of Fintech.
It is clear that at the background of the depressed global capital market, a new thing is needed to cheer and comfort the industry’s practitioners. However, if STO is only considered as a legal ICO or a wave of Fintech, it is not wrong, but it is underestimated.
In my view, Security Token may be even greater, and to some extent, its appearance is a global financial practice of the security token. Token produced by ST through the block chain technology brings the new form to securities, and will thus give a part of new meaning to securities. Perhaps, in the future, ST will revolutionize the existing securities system and become an important part of future securities, or directly develop into super-securities.
I. Looking from the well head to the down hole, we can only see the bottom hole; but looking upward from the well head, we can see the whole sky.
Looking into ST from the perspective of block chain, it is only a pass-through of securitization, and is an application as block chain enters the 3.0 stage. But if look into ST from the perspective of securities, it means that traditional securities are transformed into future securities by means of the pass-through, a product of block-chain, enabling the asset-backed securitization with a brand-new carrier.
It is well known that securities have had a history of hundreds of years. In 1603, when Dutch East India Company financed through issuing shares, they probably didn’t think that they had created a great invention in the history of human finance. Hundreds of years later, the content and the extension of securities have been expanding, and their functions have been becoming more and more extensive.
We know that securities are essentially a civil right and that this right has property attributes. Securitization of rights is also a kind of legal phenomenon, that is, the way and process of obligee to exercise rights are demonstrated in the form of securities. This phenomenon represents the symbolization of investment assets, and is a mark and inevitable result of the development of society and the development of credit.
Because of the special nature of securities, they must rely on a certain form of expression. Initially, Dutch East India Company, the first joint-stock company, financed through issuing “Stocks”. People came to the office, wrote down their invested money in the book, and then the Company promised to issue dividends for these “Stocks”. This is the first basic form of recognition of the security right — paper, which represents a particular right on a special sheet of paper through words or graphics.
With the development of economy and technology, securities have completed a thorough transformation from “Paper-making” to “Paperless”, depending on the continuous updating of the electronic technology and information network. We have found that investors no longer have securities in a physical form. The securities they have are recorded in an invisible form in the account. With the groundbreaking development and transformation, the modern securities have great differences compared to the concept of traditional securities.
However, with the development of hundreds of years, the security market has also encountered some development limitations. In the process of asset securitization, the assets capable of being securitized now cannot meet the demands of modern people. It is very difficult for some bulk commodities, intangible assets (such as copyright, equity, financial products, and claims), etc. to achieve securitization and start circulation within the existing securities system. In the process of transaction, there are even more restrictions, such as the limited time of transaction, delay in delivery and liquidation, and liquidity reduction resulted from complexity of the supervision. In addition, many regulatory portfolios and several regulatory agencies managing transactions in each dimension significantly reduce circulation of securities.
That is, the current securities system cannot fully meet demands for securities and expectations on asset securitization. In this case, the emerging Security Token provides an opportunity for further securitization.
II. When Coca-cola was originally invented, it was a medicine for treating headache, but now it is the ancestor of soda drinks, and is very popular in the world.
Block chain, honored as the fourth industrial revolution, is now an emerging industry attracting attention worldwide. However, the implementation of scenario applications is plaguing industry practitioners, capital markets and regulators. In fact, the appearance of ST not only solves the problems about block chain scenario applications, but also provides a new way for the current securities industry. On the one hand, Token, as the natural product of block chain, offers a new carrier for the current securities industry; on the other hand, distributed storage, open and transparent, non-tampering and other block chain characteristics, result in clear and modern connotation for ST, a new securities form.
Initially, ST, emerging in 2017, was only the block chain Token product receiving much attention from SEC (U.S. Securities and Exchange Commission). The focus was that whether it shall be exempted or incorporated into the securities system. Most of the people showing great interests were insiders in the currency community and Wall Street capital giants who were curious about the block chain.
If so, ST is just the bottom hole seen from the well head, or the Coca-cola as a drug. However, the development of science and technology is not up to people’s subjective wishes. When the practitioners start to deduce ST’s application and perfect its models, it is found that it is best fit to securities.
The characteristics of block chain — open and transparent, distributed storage, non-tampering, enable ST to help the current securities system to further evolve.
Firstly, it can achieve securitization for any assets (tangible assets + intangible assets) with Token as the carrier and block chain as basis. According to related data, the value of global stock assets is about US$ 70 trillion, the debt is about US$ 100 trillion, and the real estate is about US$ 230 trillion (of which residential houses account for about US$ 180 trillion and commercial spaces account for US$ 32 trillion). However, more of the assets are not securitized, such as copyrights, artworks, castles and mansions, etc. The existing securities system can’t securitize them, but ST can.
Secondly, it can effectively solve the problem of circulation. On one hand, token can make the entire transaction more convenient and solve the cross-border circulation problem. The 7*24h transaction, transaction as liquidation and T + 0 are not available in the existing securities system. On the other hand, the properties of block chain can divide assets into tiny particles, which is also not available in the existing securities. As Josh Stein, CEO of Habor, said, “Lock in capitals, not investors”, has significantly lowered the investment threshold. In the future, even as the rare artwork like Mona Lisa, once securitized, everyone can be a potential shareholder of the picture and can circulate their shares at any time.
Thirdly, it can make regulation easier. Hayek has a classic word in his book The Road to Serfdom — “If a man does not need to obey any person, and only needs to obey the law, he is free.” The protocol automatic management of block chain means, to a certain extent, that code is law. Different countries have different opinions on block chain, but will not affect the self-contained restraints of ST.
III. A butterfly in the tropical rain forest of Amazon, South America, occasionally fanning a few wings, may cause a tornado in Texas, USA after two weeks.
After Token of block chain enables securities, it undoubtedly opens the huge space in financial innovations. As many years ago, Facebook, YouTube and WeChat, derived from the data exchange agreement, revolutionized our way of life. The programmable regulation and transaction logic provided by Security Token will open up a new road for the development of securities, and this road may create a future super security system.
A phenomenon may support my view, that is, ST’s participants have developed from the earliest insiders in the currency community into main block chain practitioners and giants in the traditional capital market.
Most of the first STO companies are unknown. Lasting until Sep. 11, Ethereum, giant in block chain, participated in STO. The developer Stephane Gosselin presented a new proposal at GitHub, announcing a new security-based token –“ERC1400”. The new standard was designed to combine the fungible function of Token with security-related business scenarios, designing a universal interface. The new Token proposal focuses on a major regulatory function to enable users to issue securities in Ethernet network in a legal and compliant manner.
This is followed by the USA giant exchange operator NASDAQ. It is reported that NASDAQ is planning a new platform specially for token-based securities, which will enable the project to provide STO in a regulated environment to meet the USA’s law. It is reported that NASDAQ is negotiating with the block-chain company Symbiont to create its own platform, to enable the listing and trading of the tagged securities. Although the authenticity of the news is still to be verified, the attitude of NASDAQ toward the STO is always ambiguous. It is clear that it prepares to embrace STO.
It can be seen that, after the entry of traditional capitals, the entire ST ecosystem will be greatly changed. It will include innovative block-chain companies, block-chain giants and ST, traditional securities giant. Specially, unlike the traditional capital market, ST inherently has the characteristic of block-chain internationalization. As it is facing the entire global capital market, its gathered talents, funds and creativity will be far beyond the securities system in the past single system. It is envisaged that a super security system is already in place.
Of course, with great benefits, different countries’ governments also have different attitudes, so there are great differences between their regulatory policies. At present, there is no country relaxing the securities law related to issuance of the securities token. However, we should also see that almost no country is willing to miss the opportunity to upgrade the securities system. In fact, in turn, the difficult issuance of national regulatory policies is also a necessary prudence for stakeholders.
Looking into the history, we will find that technological development can drive economic development and push policy development. I believe that ST represents the future securities, or at least is the important part of the future securities system. Only the realization of ST products financing is legalized, it is possible to develop a more potential market for real assets, which is a scientific and technological innovation for the benefit of all mankind, and there is no reason to be strangled.
To Be Continued