Explaining Security Tokens

The Finhaven platform makes it easier and less costly to raise capital and issue security tokens

How advancement in blockchain technology can be used to the benefit of society is still being determined. Nowhere is this more true than the financial industry where heavy regulation has long guided the construct and use of financial instruments. Today, the technology has created confusion amongst regulators and early adopters of cryptocurrencies, with a greyer-than-grey area surrounding the selling and investment of tokens in many jurisdictions.

Initially, security tokens were meant to quell these issues, by virtue of a name that distinguished them from utility tokens. But since the advent of the term ‘security tokens,’ confusion has increased amongst industry participants with questions around characteristics of that token and where it falls into regulatory compliance. This begs the question of whether crypto assets termed as security tokens are a new asset class deserving of regulatory review and investigation.

What are security tokens?

Security tokens are digital securities backed by traditional financial products and issued via a smart contract. They establish a new and very attractive set of characteristics for the product. For instance, security tokens allow for fractional ownership- owners can divest their position far earlier than traditional asset ownership would allow (with regulatory lock up periods being adhered to).

What makes security tokens revolutionary?

Issued by smart contracts, security tokens can be coded to self-execute, achieving a degree of liquidity unseen before in securities markets. Smart contracts autonomously and automatically carry out actions subject to fulfilment of a set of pre-determined conditions, allowing for more efficient management of securities. This means that investors can have greater autonomy to move and control their own assets in a frictionless manner, supplemented by a transparent, immutable record of ownership.

Transitioning to tokenized securities cuts down or eliminates much of the complex, lengthy, and inefficient processes associated with trading traditional securities. They can be encoded with ownership rights and privileges between the shareholder and issuer, making the management of securities easier and more transparent. This means that some existing middlemen will be at least partially replaced by automated service functions. In this way, brokerage charges, commission fees, and other typical expenses are reduced and liquidity discount is minimized.

Backed by a cohesive regulatory network, security tokens allow for global access and free market exposure, providing the additional benefit of potentially improved asset valuations. Deals can be marketed to any investor in the world with an internet connection, boosting international trade and liberalizing and democratizing securities exchange. Furthermore, the opening up of capital markets could help facilitate significant technological leapfrogging in frontier capital markets.

Our Take

Finhaven enables the creation of a unique security token for each issuer, defined as a regulatory compliant security being made programmable. This means that new, or existing, financial products are issued via Ethereum smart contracts using the platform, with deal documents, diligence, and regulatory compliance coded into the contracts. The platform is built on top of the Ethereum blockchain and utilizes ERC 902 transfer standard, particularly compatible with securities exchange and further explained in Finhaven’s whitepaper. Dividends are paid through the bitcoin remittance layer, where investors accumulate bitcoin as the return from investments.

Forecasting the trajectory of technological change is never trivial. The notable quote from Stanford University computer scientist Roy Amara, now commonly referred to as Amara’s law, succinctly summarizes the typical trend:

“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”

This is perfectly exemplified by the dot com bubble of the late 20th century, with which the explosive take off of blockchain technology and cryptocurrency is often compared.

Finhaven is taking the long approach, pushing towards a decentralized future by confronting the technical and regulatory issues commonly associated with blockchain based value exchange.

Regardless of the general position on the blockchain technology hype cycle, security tokens undoubtedly hold the power to transform the landscape of securities markets globally. In an ecosystem where technology is evolving at a much faster pace than regulation, Finhaven is at the forefront of the market putting the focus on regulatory compliance and building a technical framework required to underpin the future of asset exchange.

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