Defining Security Tokens and Their Benefits
At Sisu, we have a vision for automated financial planning and implementation for middle-class Americans. To make this vision a reality, we’re planning to hold a security token offering (STO), for which we applied confidentially with the SEC for a Regulation A Tier 2 qualification.
But before we speak about our planned security token offering on this blog, we felt it’s imperative to clarify:
- How we define security tokens
- What types of security tokens we expect
- And what are their benefits over traditional securities
So we’ll use this article to go into those three questions, illustrating what security tokens are and their implicit benefits.
What Are Security Tokens?
More and more companies want to issue blockchain-based tokens with inherent value. These tokens are generally tied to an asset. Interestingly, this asset can be almost anything, from tokenized real estate to gold-backed tokens.
But if you’re active in the crypto space, you have probably heard of the term ‘security tokens’. We would define a security token as follows:
A security token is a cryptographically secured token, based on a public blockchain like Ethereum, which represents a security.
According to some, they’ll become mainstream in 2019, while others have indicated that 2018 is “the year of the security token”. Regardless of who’s right, we expect that within a few years, security tokens will widely be used by companies inside and outside of the cryptocurrency industry.
Types of security tokens we expect
The three types of traditional securities are stocks, bonds and options. These respectively represent ownership in a company, the debt of a company (or government), and the right to buy or sell an asset.
Applying this same taxonomy, a security token can represent a share in a corporation, a loan or bond, or an option (or other derivative).
Indeed, there have been numerous projects that are aiming to tokenize one (or multiple) of these types. Examples include Dharma, which is planning to create tokenized debt, and of course our own, Sisu; as we plan to tokenize our holding company’s equity.
With a good understanding of security tokens, we can now turn to their expected benefits. Of such benefits, there are many. We will not go much into detail here, as there have been many other articles on Medium (and elsewhere) on the benefits of security tokens (see for instance McKeon’s Security Token Thesis).
However, we do want to briefly stress the different functions security tokens can have. Specifically, cryptocurrencies and cryptotokens have often been called “programmable money”. Evidently, security tokens aren’t money — they are securities. But they are certainly programmable, which will allow for new functionalities that will improve different aspects of the current ‘security supply chain’.
As an example, for Sisu Holding, Inc. we are planning to issue tokens that would enable token holders to vote on specific aspects of the business. We believe that this so-called ‘token holder voting’ mechanism will maintain shareholder value, while at the same time making the voting process more efficient.
Similarly, we expect another function of security tokens to be automatic white- or blacklisting. This would allow a company to only sell its securities to investors who have a verified cryptocurrency address and underwent Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. In other words, such a security token can then only be sold to certain buyers (who are on the white list), excluding blacklisted buyers. In our opinion, this programmed verification can make the process of selling securities more efficient.
Certainly, there are many more examples of new functions that security tokens may have, and many are still to be invented. But the point is that with such programmable tokens, we expect further efficiency improvements in the way we issue, purchase and process securities.
Tying It All Together
While we expect security tokens to offer new functions and other benefits over traditional securities, it’s not all fun and games. The security token market will surely experience growing pains. User experience may initially be poor (as is the case currently with many crypto projects) and it remains to be seen exactly how liquid tokenized equity can be while still adhering to national and international regulations.
Nonetheless, we truly believe that in the coming years we’ll see a huge industry bloom of ‘tokenized anything,’ which will cover all kinds of assets from financial securities to real estate, art, and beyond. And in that sense, this article already gives you an insight of what is possible with security tokens — and also why we, with Sisu Holding, Inc., have chosen to go this route.