Regulations around Security Tokens

Tokens serve different functions and come in different forms. For this reason, they are hard to precisely define. Some represent the user’s reputation in a system (augur), a number of files saved in a system (filecoin), a deposit in USD (tether) etc. Therefore, a token can fulfil various functions including serving as a share for a company, a currency, a digital asset and so on.

The security token structure has its shortcomings

First, the organisations conducting lCOs are always struggling to avoid their tokens being classified as securities because classification as such would come with a lot of limitations and regulations on how they should be exchanged and who should invest in them. Secondly, secondary liquidity and trading are greatly reduced for some kinds of tokens.

There are imprecise regulations in some jurisdictions and total lack of it in others, thanks to the technicalities that come with cryptocurrency
Governments are having a hard time taxing and even creating clear regulatory structures for security tokens. Since digital assets come in more than one form and tokens elicit different realities, it has proved hard to classify them precisely and there have been suggestions to create new laws specifically designed for security tokens but this hasn’t been realized yet.

Cryptocurrencies overlap with traditional classifications at times but don’t think lack of regulation makes them safe. Let’s look at the token securities, for instance, they’ve been found to fail the Howey Classification which makes them partly eligible to the Securities and Exchange Act of 1934. However, as of now, lack of precise regulations makes them quite unattractive to a keen investor because of the ambiguity involved.

Regulation on security tokens is safer and efficient

Regulation is actually a great thing worth pursuing. Suppose a bubble burst (in case if it is a bubble, at all), how will you recover your assets? This is why new laws need to be created and imposed on the many ICOs listing today.

What are the setbacks of Security Tokens?

The scrapping of financial institutions from all investment transactions is seen as advantageous for the crypto community. However, there are a number of disadvantages and risks that come with it. When the middlemen are removed, the industry will have to move the middleman’s roles and responsibilities onto the seller or buyer in the transaction.

Normally financial institutions play a few roles: preparing marketing materials, ensuring higher levels of security and regulation compliance, soliciting investor interest, ultimately driving the successful sealing of the transaction, and underwriting a deal.

Security Token Offerings will require the issuing party to underwrite its own deal via an array of third-party audits, solicit investor interest, prepare marketing materials, and have sufficiently high confidence in the security and regulatory compliance. A lot of traditional investors tend to believe that a huge percentage of the potential issuers are unable to successfully execute these functions without the help traditional financial institutions. We have our fingers crossed. Time will tell who’s right.

Security Tokens are more important than we think

Security Tokens bring many improvements to the traditional financial products. They remove the middleman from all investment transactions (often some form of an investment banker). Removal of middlemen ensures lower fees, automated service functions, larger potential investor reach, free market exposure, faster deal execution, and lack of manipulation.
In perspectives of lower fees, many transaction fees associated with most of the financial transactions tend to be derived from payments that are owed to middlemen (such as bankers, etc.). Security Tokens serves to remove the reliance on bankers which reduces fees. Smart contracts too may soon decrease the overreliance on a lawyer. These smart contracts are poised to reduce the cost, complexity and the paperwork involved in managing securities (wiring of funds, collecting signatures, mailing of all distribution checks, Sending K-9s, a collection of the W-2s, etc.).

On faster deal execution, the benefit lies in a little number of people involved in a transaction. A deal involving more people takes longer to execute. When Security Tokens eliminate middlemen from their investment transactions, they enable shorter timelines for issuing parties to offer their security. In additional, immediate trade settlements on the secondary markets for Security Tokens are poised to become an attraction for issuers and investors alike.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the position of Kambio Ventures.