Asset-Backed Tokens as Digital Securities: How they Work
We have all grown accustomed to digital assets in classes such as stablecoins, altcoins, or Non-fungible tokens. Although stablecoins are known to be the equivalent of popular currencies on the blockchain (EURO, and USD esp.), altcoins are primarily characterised by their volatility and frequent fluctuations. Non-fungible tokens on the other hand are not fully comprehended by many just yet. Their inherent lack of fungibility means that they are scarce and cannot be exchanged as frequently as the remaining asset class.
Asset-backed tokens have risen in recent years to further bridge the gap between the blockchain and the traditional financial system. They offer investors the opportunity to invest in real-world assets in the form of digital tokens on the blockchain.
The purpose of this piece is to shed light on what asset-backed tokens truly represent and how they differ considerably from other crypto-native tokens.
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Asset-Backed Tokens in its Simplest Form
Asset-backed tokens are also referred to as Asset-backed Securities. ABTs are digital tokens based on the blockchain. However, unlike other digital tokens that are speculative, ABTs derive their value from assets in the physical world.
ABTs could be digital representations of all kinds of physical assets ranging from real estate to art, company equities, and internationally traded commodities such as crude oil, diamonds, and gold.
Typically, the asset class that ABTs represent are assets that are otherwise illiquid and could be classified as the domain of the rich. Through digital tokenisation, ABTs create the perfect system for individuals with moderate income to purchase tokens representing a fraction of the cost of the entire asset.
This creates an investment opportunity for all who would otherwise have been unable to afford to invest in such assets.
Asset-Backed Tokens as Securities
As stated earlier, Asset-Backed Tokens are not your typical crypto asset class, they are considered securities. This is because the kind of assets they represent are in the physical world which is under the jurisdiction of national governments. As such they are regulated and treated as real assets and are bound by rules applicable to such asset class under national laws.
Platforms that specialise in digital securities have to be fully registered and in full compliance with the rules guiding securities. These platforms generally stay in compliance with laws as established by the Securities and Exchange Commission (SEC) and the Financial Industry Regulation Authority (FINRA).
These agencies generally ensure that security tokenisation platforms stay compliant and investor funds stay secured at all times. In this regard, digital security platforms (tokenisation and exchange platforms) do not operate on public blockchains such as Ethereum, Solana, Cardano, and the like. They usually build special-purpose blockchains to accommodate regulatory requirements (like KYC) and the privacy that blockchain offers.
List of Asset-Backed Tokens Platforms
There have been quite a number of digital securities platforms that have emerged in recent years. Some of the most notable digital securities platforms are;
Which Real-World Assets can be Tokenised?
Just about any physical asset can be tokenised on the blockchain. But generally speaking, digital securities is quite common among assets such as real estate (which is otherwise illiquid), artworks, crude oil, company equities, and internationally traded commodities such as gold, soybeans, and diamonds.
In the real sense, investors do not buy these commodities directly but only invest in what can be tagged as an investment pool where the number of tokens hold signifies an investor’s share of the entire investment.
The most beneficial aspect of digital securities is that token owners are at liberty to trade these tokens when they deem fit, creating a form of liquidity for these commodities. Exchanges usually start in the primary market where the tokenisation initially takes place. The tokens then enter exchanges, otherwise known as the secondary market where they can exchange hands as the holders see fit.
Benefits of Digital Securities
Succinctly, the benefits of asset-backed securities are mentioned below;
- They create liquidity for assets that are otherwise considered illiquid
- ABTs create an opportunity for average investors to hold investments in assets that are ordinarily available to the ultra-rich
- It has been a very good source of fundraising for companies in these industries through crowdfunding
- Companies no longer need to wait for years before raising funds as is usually the case in the traditional system through Initial Public Offerings (IPO)
- Asset-backed tokens remove the burden of bureaucracy and paperwork that are typical of the traditional financial system
- ABTs help to eliminate the need for middlemen such as stock brokers who charge high commissions for their services
Conclusion
Asset-backed tokens have become the game-changer in so many ways and it is only a matter of time till they become the preferred means of fundraising by companies in all industries. For now, they offer average investors a huge opportunity to hold a slice of high-class assets.
