The Security Token Revolution

As security tokens become implemented globally, new opportunities for the marketplace are beginning to crystallize.

Revolutions are opportunities for change, but unlike previous transformations, security tokens have the ability to realize liquidity from illiquid assets while preserving the innate values of those assets.

Perhaps at the end of 2019, we stand on the cusp of a watershed which heralds new growth for industries through the accountability and transparency afforded by tokenization. The opportunities are enormous and managing the delivery of these services will be critical to the facilitation of market uptake and investor confidence.

The Liquidity Opportunities

Security tokens represent assets on the blockchain. Not only do they represent stores of value but to be viable they must also provide security, transparency and fungibility for investors.

Some physical assets are inherently illiquid for a variety of reasons including production constraints, regulatory conditions and market sentiment. Security tokens are innovative because they provide new opportunities for industries wishing to realize liquidity on hitherto illiquid assets without compromising on the core properties of those assets.

Value previously locked within physical assets now has the potential for liberation through tokenization. Most importantly the model provides accountability and transparency, vitally improving security for investors. This, in turn, improves investor confidence and assists with the growth of the marketplace as a whole.

A Golden Opportunity

An excellent example of this burgeoning marketplace and mechanism is gold — a trusted store of value since ancient times.

Traditionally the cost of mining gold has been prohibitive due to the high capital investment required for discovering and proving up gold resources and also the high costs associated with the mining and extraction process. Security tokens are offering new methods for miners to raise capital for their operations without diluting their businesses or crippling their financial models with interest payments on borrowed capital.

The innovative use of the blockchain to tokenize illiquid assets is helping facilitate access to liquidity and financing for gold miners. This process sets the stage for further industries to assess the opportunities that security tokens offer.

Value Through Tokenization

This total package combining tokenization of a currently illiquid asset with a suite of risk mitigation strategies provides the model for further use cases. Suppliers of a variety of asset classes and services will be able to raise capital for projects, while investors are able to engage with suppliers in a secure and transparent manner. The potential for security tokens to provide opportunities across a range of industries seems clear.

In the case of gold, the constraints associated with storing and trading physical gold bullion are reduced through tokenization. Gold stored in vaults has security issues and costs associated with transporting and trading that gold. However, security tokens backed by gold, can remain in a single digital wallet and continuously traded 24 hours a day, after an exchange listing. These attributes provide enhanced asset liquidity and increase the potential volume of trading that can occur.

Security Tokens — The Biggest Innovation In The World Of Securities Yet!

Innovations such as digital security tokens are sending ripples across industries beyond mining. If gold that is yet to be mined can be tokenized what other possibilities are there for industries to realize liquidity from illiquid assets? It seems clear that other resources such as timber, coal and land could be tokenized but it will be very interesting to see what other use cases arise across our global economy.

One of the greatest opportunities in the security token space exists in the tokenization of securities: stocks, bonds and options. Analysts are estimating that the potential market capitalization of tokenized securities can already be valued at over $1 trillion. One estimation even predicts that the market for tokenization is set to reach $2.25 billion by next year.

Security tokens are being heralded as the biggest innovation in the world of securities since they have been in existence. The benefits that the blockchain’s accountability, transparency and security bring to the marketplace make tokenization one of the most exciting opportunities in the near future.

Value is added to the tokenization process through automation of functions which have traditionally relied on manual oversight. The ability to automate functions such as dividend disbursements, voting rights, governance and interest payments mean that the securities marketplace will become increasingly transparent and equitable. This enhanced functionality will act as a catalyst to drive further adoption of security tokens.

Any reduction in the possibility for fraud and manipulation will inevitably grow investor confidence which benefits the entire market. Additionally, as the ownership of tokenized securities is immutably stored on decentralized ledgers the cost of trading across various platforms will be reduced and liquidity increased through ceaseless transactions.

These are but a few benefits that security tokens will offer to the securities marketplace. The combined benefits will amount to improved services for investors, greater access to investment capital, and enhanced security for the industry.

Clearly, 2020 will be a fascinating year for security tokens, highlighting the benefits of transparency and security that the blockchain brings to the marketplace!

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