Security tokens have been moving into the forefront of the crypto investment community as more and more companies are looking towards raising funds through a regulated, tokenized investment vehicle that still allows them to raise funds through token sales but without the regulatory uncertainty. Security tokens can offer that.
Security tokens offer a low-cost, regulated funding option for startups as well as an opportunity for international investors to invest in promising, young, high-growth companies.
However, despite security tokens solving the issue of regulatory compliance, some industry experts and investors still have concerns of whether these new cryptographic investment vehicles will succeed.
In this article, we will look at and address the three main concerns that skeptical investors have about security token issuance.
Limited Access for Private Investors?
As security tokens are financial securities issued under local securities law, not everyone can invest in them. To buy and hold security tokens, investors will generally need to undergo KYC/AML checks before they can invest in these securities. Moreover, many security tokens are initially only issued to accredited investors, which means small private investors are left out of the Security Token Offerings (STOs).
However, once security tokens start being traded on the secondary market, retail investors will also be able to buy and hold security tokens in the same way they can invest in stocks and bonds. In fact, this will be done on largely regulated exchanges that will automatically require KYC/AML as part of their client onboarding process.
Liquidity, or rather the lack thereof, is another concern that has been cited about security tokens. Due to the general illiquidity of blockchain tokens and the limited retail investor access to security tokens, there are concerns that there will not be much of a secondary market for security tokens.
However, there is a growing market of security token exchanges, such as tZero and PolyMath, that are launching to provide a trading platform for security tokens that anyone can access. Moreover, more and more cryptocurrency exchanges are looking to add security tokens to their offerings. For example, leading European digital asset exchange BitBay has agreed to list CentrumCoin’s security token when it goes live in the secondary market later this year.
Hence, it is difficult to envision a scenario where security tokens will not experience ample liquidity on exchanges.
Some investors are also concerned about the potentially complex nature of security token regulations given the nascent nature of this new asset class. This potential issue, however, is being addressed by the fact that compliance can be “hard-coded” into security tokens.
As security tokens fall under securities law before companies can launch a security token offering, they are required to undergo thorough legal vetting of their offering and the structure of their tokenized securities to ensure that they meet all legal requirements within the jurisdictions they will be launching their token.
Once that process has been completed, compliance can be effectively coded into the token by ensuring that only investors who are allowed to invest in the offering can physically do so.
The Security Token Opportunity
Despite potential concerns surrounding security tokens, there is a high chance that we will soon live in a world where tokenization of assets will be the standard and everyone in the world will be able to trade these blockchain-powered tokens.
Until then, existing regulations will need to be adjusted, new regulations may need to be drawn up and an entirely new issuance and trading ecosystem will need to evolve. However, currently, everything seems to be pointing in that direction.
With industry leaders, such as CentrumCoin, spearheading security token adoption, we can expect to see more tokenized securities investment opportunities coming our way.