Are Security Tokens the thing?
If you are curious about Security Tokens, then, you must have heard about Blockchain and Cryptocurrency (digital money like Bitcoin). In the world of Cryptocurrency, it is important to understand the unit of value (Token) involved and what that unit can do. Especially, if there is an intention to invest in a Blockchain project or company.
Firstly, what is a Token? It is an object or a symbol that represents another thing. It can be referred to as a unit of value or an asset issued by a company to represent a financial worth or service of the company. Tokens represent a particular asset or utility in Blockchain that is transferrable. The qualities that describe a Token are its ability to be tradable and exchangeable.
Tokens can be anything of value ranging from gifts to royalty points, products or digital currencies.
We can classify Token into two major types based on its function, namely; Security Token and Utility Token.
The focus of this discussion is the Security Token. Therefore, let us talk about Securities.
Securities are financial assets of a company that have monetary value. Owning a company’s financial Security means you have a part ownership of the company and your ownership rights can be called as an investment whereby, you benefit from whatever profit the company makes. You can also choose to sell your rights to that ownership. Examples of Securities are Shares, Bonds etc.
A popular type of Security is Shares. Oftentimes, companies offer investors their Share during a process called Initial Public Offering (IPO). An investor buys a portion of company Share with a promise of a return in form of dividends, interest rates or in one form or another. This process in itself is a contractual agreement and when a Blockchain company offers its asset for sale through a public fundraising process, it is called Security Token Offering (STO). Here, the asset is referred to as Security Token instead of Shares.
Thus, a Security Token of a Blockchain project is like company Shares that can be created and issued when a Blockchain company starts up during the crowd-funding process.
At the groundbreaking point of Blockchain technology, there was a need to raise capital through crowd-funding. Investors were offered Tokens (Bitcoin) in exchange for their money. This process was referred to as Initial Coin Offering (ICO) because the Tokens offered were not in form of Security. Rather, the Tokens gave only a user access to the project end result and also as a form of value exchange.
Utility Token did not promise ownership rights to the company, it promised user ability to use the product.
And because it is a currency that can be exchanged, it is a commodity on demand. Investors buy Utility Tokens for daily currency exchange to earn profits. A unit of a Token can be bought at $1 in the morning and sold at $2 in the evening. This demand fuels market appreciation or depreciation. This has been the most popular aspect of Cryptocurrency, whereby platforms all over the world allow owners of Tokens to trade their Crypto-money like Bitcoin. The adoption of ICOs allowed investors all over the world to participate in the seamless capital generation to start-up Blockchain based projects.
A lot of trending activities have evolved in the Blockchain industry since Bitcoin broke the wave in 2008, and one cannot but wonder what the future brings. Is Security Token a trend or a necessity? What is new and exciting about Security Token? These and many other questions have been raised and the answer is simple;
Security Token is a growth support for Blockchain Industry.
Why Security Token?
Every new venture with a high drive towards success is expected to experience some bumps along the way. It is however noted that a rise from these bumps usually brings growth. The ICO was a massive success in the 2017 and the explosive growth was doubled in the first half of 2018. The hype was fuelled and ICO was the trend. On June 12, 2017, a Blockchain based project (Bancor) held its ICO and raised $153 million in 3 hours. Every company with a new project wanted an ICO and this drove the interest in Blockchain generally.
However, the reality was that most ICOs were a presale of Utility Token for applications yet to exist. Therefore, it created a lot of vacuum that was filled by scam companies, sketchy projects and companies unable to deliver their promises. This is because of a lack of regulation. A lot of Investors lost their money on Projects that did not see the light of day. Hence, ICOs got a strong negative reaction from the Securities and Exchange Commission (SEC) and major Social media platforms banned ICO ads. Then comes in; STOs- Security Token Offerings.
Because Security Tokens are a form of Securities, a company has to register the offering with the regulatory body (SEC) depending on the laws of the country. Although this has a cost implication, it will curb the emergence of scam offerings while giving assets to investors with a promise of a return in investment instead of a promise of use. Therefore, an investor can be sure to have protection.
A Token can be identified as a Security if;
· It is sold as an investment.
· It represents a debt for a startup.
· There is a person/company upon whom the investors rely.
As the marketplace gets more enlightened, Investors are beginning to appreciate the need for Security Tokens and this has an effect on recovery from the fall of ICOs. There is a belief that Security Tokens will restore Cryptocurrency market to its earlier boom. This is because it offers many options of financial rights that Utility Tokens could not provide.