An introduction to asset backed tokens
In the beginning, Initial Coin Offerings (ICOs) revolutionized the concept of public funding and crowd sales. It was an alternative funding tool which became instrumental in disrupting rigid and regulated structure of IPOs by allowing developers to collect millions of dollars in exchange for a potential promise of developing something ground-breaking with a mere white paper. Many a projects came into existence with a huge promise, created a technical paper, built a community building, created and distributed tokens to raise funds. Post the fund raising more than half the projects were never able to bring out event a working product, that has made investors skeptical about investing in token based projects in early stages.
With no regulations, there were amazing success stories while there were some outright scams as well. Thus, in order to safeguard the interests and reduce the skepticism of investors to build an even bigger base of of potential investors which not only included people invested in the cryptos but also included institutional and traditional investors who wanted to explore token investments but wanted wanted a risk averse option to tread the waters — thus they found regulated asset backed token investments lucrative. The introduction of regulations lead to the creation of a new type of token different from a utility token, which were backed by assets, to make the token issuers more accountable for their actions — these were known as asset backed or security tokens. The fund raising mechanism for security tokens was annotated as security token offering (STOs).
The fractional ownership, an alternative investment opportunity, a transparent structure and returns on investment coming in the form of set dividends has attracted a large audience of traditional investors to investing in tokens whereas at the same time asset backed tokens have found resistance from the crypto investors who’s main reason to move away from traditional market was avoiding regulations among other things.
A token is classified as security when there is an expectation of profit from the effort of others, which can also be determined by the simple Howey test. At its very essence, a security token is an investment contract which represents legal ownership of a physical or digital asset. The true value in security tokens lies in how they can redefine the meaning of “ownership”. They can democratize assets and distribute them among people all over the world. To give a very crude example, instead of owning a gold coin, which may be out of a lot of people’s budget, it is now possible for 100 people to own fractions of that gold coin — but the whereabouts of the custodian holding the gold has to be vetted and verified.
Asset backed tokens, unlike utility tokens offered via ICOs, are subject to federal security regulations, they are compliant from the first day itself. So, in the USA, security tokens can apply to be classified in one of the following categories, depending upon their jurisdictions — Regulation D, Regulation A or Regulation S. Other countries such as Japan, Switzerland, Germany, UK, etc. are mature markets where security token regulations have been deliberated and have been or are in the process of being placed into effect.
The check points of issuing/creating asset backed tokens and distributing them are as follows:
Blockchain Consensus Protocols: A protocol is the underlying technology on which a particular project is built. While Ethereum is still the most popular protocol with thousands of developers and contracts running on top of them, there have been many more protocols such as Algorand, Stellar, Tezos, R3 Corda, etc. working diligently to provide better options to issue asset backed tokens.
Smart Contracts: Smart contracts are self-executing contracts with specific instructions written on its code which get executed when certain conditions are met.
Asset Tokenization Platforms: The asset tokenization platforms are responsible for having compliant, regulated smart contracts for the token creation/issuance and serve as the primary market for asset backed token purchase/allocation. A few of these platforms are Polymath, Harbor, Securitize, Bitbond, etc. The customized services provided by these platforms cater to the basic needs of legal, compliance, smart contract readiness to cater to the need of the asset owner.
Jurisdiction of Asset and Jurisdiction of Token distribution: In case of an immovable object, such as real estate, the asset owner to get his/her asset tokenized requires to provide region legal document to comply with the vetting necessary whereas it is the choice of the asset owner whether he would want the asset to be distributed to a specific White list (provided by the owner), accredited investors or would they be comfortable enough to open the token distribution to a wider KYC/AML vetted audience.
The Raise: In Germany, the amount to be raised if below $ 8 million, doesn’t require the asset owner to get a Ba-Fin license thereby reducing the time of the asset backed token to the market. As the amount of the raise increases, the compliance and requirements to be followed increases which makes getting a legal advisor on board very important.
Secondary Markets: The secondary market serves one of the most critical functions in the crypto ecosystem which is fulfilled by exchanges to provide a highly liquid platform for token owners to buy/sell their tokens. Some of the asset backed token exchanges are Latoken, Smart Valor,, etc.
To conclude, asset tokenization has the potential of opening up asset-ownership to a wide variety of people by making crypto investments secure and less volatile. The gestation period for asset tokenization has been high but in the coming years it is sure to become a norm for raising funds in real estate, art, commodities, equity, debt, etc.
