The Biggest Problem Facing Security Tokens

Why Compliant Tokens Need Compliant Networks

Over the past year, as the blockchain fever broke and the ICO market cooled, one issue was repeatedly painted as the culprit that ended the boom. Some blockchain tokens were, according to regulatory bodies, unregistered securities. Crackdowns from the SEC forced companies thinking about conducting ICOs to slam on the brakes and carefully examine token functionality and purpose before launching.

While Lition was able to hold a wildly successful and compliant ICO, many other ventures’ business models require them to rely on tokens that function as securities, or “security tokens.

Security tokens were originally flaunted as a solution to the compliance issues plaguing the ICO market, the idea being that security tokens would explicitly function like traditional stocks and be built from the ground up to ensure compliance with securities regulations.

Before security tokens, some ventures were doing anything and everything they could to convince regulators that their tokens had a utilitarian functionality when in reality, buyers were only purchasing tokens on speculatory terms. By conducting a security token offering (STO), companies can now sell ownership stake and voting rights while offering investor protection and transparency. This option allows for the world to take advantage of a more flexible security, tailored-made for the digital age.

There is just one problem…

While the security tokens themselves are set to transform the way companies fundraise and investors trade, the blockchain platforms that support these securities networks are not compliant with investor privacy laws.

Currently, the most popular DApp platform is the Ethereum blockchain network which has been used as a framework to easily construct blockchain solutions on top of its infrastructure. However, the Ethereum platform has a fundamental flaw for securities applications. The entire network is public, meaning anyone can access information about who and how many people own securities, which is a violation of privacy for private companies.

This inconvenient truth threatens the entire model. Compliant security tokens simply cannot run on the Ethereum network, which is why leaders in the space like Tokeny are turning to other blockchain platforms like Lition to bring security tokens to market.

Compliance through the Lition infrastructure

The Lition platform boasts key features like private-sidechains and deletability which can be used to protect investor information and comply with the GDPR in regards to security tokens. With increasing security token adoption and widespread asset tokenization right around the corner, the importance of establishing a rock-solid, compliant platform for blockchain securities cannot be understated. Transitioning from ICOs to STOs lacking a compliant network would legally be jumping out of the frying pan and into the fire.

If the blockchain sector ever wants to reach mass adoption, these instances of legal ambiguity and uncertainty have to be eliminated, otherwise companies will not be willing to invest the time, capital and energy in to making sure the tech reaches its full potential.

To expedite this process, Lition has been working closely with the German government to help overcome legislative roadblocks and craft a legal framework for security tokens so that companies can operate with confidence in the space. By doing so, Lition aims to host security tokens in a compliant manner on its platform in the near future.

Security tokens are the next big innovation in asset management and finance. It’s time that the world embraces an asset class native to the digital age, but top-to-bottom compliance must be the first priority in getting security tokens off the ground. Lition has both the technical knowledge and legal expertise to usher in the era of security tokens and leave the days of compliance frustrations behind.