From Stock to Token: Are security tokens worthy of the hype?

Let’s be honest, security tokens are likely the most anticipated application of blockchain technology right now. Much has been written about the incoming security token market and how it is poised to alter the stock market as we know it. So why the hype? And further, is it worthy of the hype?

The crashing and burning of Initial Coin Offerings (ICOs) and cryptocurrency valuations in 2018 has shifted market attention to security tokens, with commentators making lofty expectations for the tokenization of stock. It works like this: Buying regular company stock means you own a stake in that business. Now, take this concept and expand it to any security — like art, property, bonds and more — and couple it with the ability to purchase just a fraction of the asset instead of the whole. This is what security tokens promise to bring into the world of investment.

The separated worlds of blockchain and investment have largely agreed this could be a game-changer. Some pundits even believe security tokens could grow into a multi-trillion dollar market. Yes, trillion with a big T. But what makes this different from utility tokens offered in ICOs?

While utility tokens were intended to offer some kind of service in exchange for expenditure, security tokens do not serve this function. They are the digital confirmation of an asset, an electronic certificate that backs said owner to said asset — and the exciting part is the flexibility of this asset.

Tokenization is coming to the stock market and, thanks to the technology of blockchain, so is fractionalized ownership. This is where security tokens in the stock market start to become very interesting, as this allows items and goods to be split into smaller, buyable pieces instead of the whole. Think about it: rather than bonds and stocks, security tokens and the ability for fractionalized ownership could see things like art and real estate broken into pieces and purchased.

Another element giving credence to the security token hype train is certifiability. Not only do security tokens go through a much more rigorous process of checks and balances than utility tokens and crypto projects, but the system behind securities is highly regulated. Security is not just a tagline — security tokens are being traded on stock markets and alternative exchanges like any other stock. Therefore, they come under the same sort of governmental oversight one would expect.

The truth is that this remains new, fertile ground for investment. The big players of finance are already starting to take note. For example, the founder of the company that owns the New York Stock Exchange recently announced a new venture, Bakkt, and the Swiss Exchange also plans to build a regulated exchange for tokenized securities. Security tokens are bringing blockchain technology into traditional systems in a way we have never seen before, and it will be an interesting journey to see how investors react.

Will they embrace the technology, or stay with stocks they know? It is too early to tell, but excitement is beginning to turn into something more. This investment paradigm is only starting out and there is undoubtedly a lot of room for this sort of technology to grow within the realm of international investments.