Digital Securities Series Part 1: Defining a Digital Security
Hello, my name is Alec Beckman. I am the Head of Growth and Partnerships at Security Token Advisors, the leading advisory company in the Security Token Industry. Security Token Advisors helps companies prepare for tokenization by providing:
- Marketing
- Vendor selection guidance
- Project management advisory
- Investor relations help
- Go-to-Market and Liquidity Strategies
- Education Packages and Materials
- Coordinated press pushes
I have been in the tokenization space for longer than most, and over time, I’ve spoken to hundreds of real estate developers, investors, and asset owners who are interested in issuing tokens representative of ownership in a real world asset.
During this time of gathering information from digital-curious issuers, it has become apparent that there is a need to define “Digital Securities”. There is a lot of confusion from the public, as many people have theorized that creating a token supersedes securities law and regulations you would abide by when raising capital for a security.
First, what is a security? A security refers to a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in an asset that you expect to make or lose money on.
Securities have long been separated into two categories —
- Public and liquid assets that can be traded — think stocks, bonds, mutual funds, etc.
- Private assets that you are investing in for speculation or cash flow distribution — think Real Estate (99% of real estate is private), private venture companies, private equity, assets ownership where cash outs come in the form of a liquidity event (going public or a sale of the entity).
Securities behave very differently than a digital bearer asset like Bitcoin or Ethereum, the two most popular and valuable cryptocurrencies.
What is a bearer asset?
A bearer asset is a type of asset in which no ownership information is recorded by a third-party and the security is issued in physical form to the purchaser. In simpler terms, if I possess it, the value is mine.
How do Securities and bearer assets differ in regulation?
Securities and bearer assets behave differently. The SEC is the governing body of securities and has very specific requirements for protecting investors from bad actors looking to create fraudulent investments.
Securities have requirements, such as who can own them, how they’re held (custody), how they’re traded and cleared, and more. For instance, all investors must go through Know Your Customer and Anti-Money Laundering checks. Securities also can not yet be traded on a decentralized exchange (DEX), or through a non-authorized broker dealer. We will address specific compliance requirements in another part of this series.
When looking at Securities, it is important to note that most of the public securities are already Digital. A digital security is a security that is issued in a digital format, be it in the form of a token, or a digital representation of ownership that is prove-able on an online platform. Most securities today are issued in a digital, dematerialized (meaning, not on paper) format. Think of a broker, like a Robinhood or Fidelity, the ownership and official records are held in digital databases maintained by the broker.
In this series, we will take a deeper dive into digital securities and what companies are doing to improve efficiency in capital markets to achieve more, using technologies like blockchain.
Part 2 of this series will address real estate specifically, and how private issuers may create digital representations of ownership for easier investor onboarding, data management, and ultimately improved liquidity.
Other topics that will be covered include:
- Players in the digital asset ecosystem
- Different Forms of Liquidity
- Custody of Digital Assets
- Securities Compliance and qualifications
- What is holding back Security Tokens?
- Why Tokenize?
- Different SEC exemptions
- Public to Private
- Securities Compliant Protocols
Please reach out to alec@securitytokenadvisors.com for any questions on this series, general interest in the tokenization/digital asset space, topics you think we should focus on, or if you’d like to inquire about tokenizing and trading your own assets!
