How Will Investors Benefit From The Tokenization of Securities?
The current brutal bear market in the cryptocurrency world raises an important question – what gives cryptocurrency value?
The answer, sadly, is that speculation, wild guesses and algorithmic trading, as well as deliberate price pumps, drive the fluctuations and thus the perceived value.
But even if the crypto market is still valued at around $200 million, there remains little understanding of the real-world impact of blockchain technology.
With such a paucity of information, it is difficult to estimate the value of a blockchain startup.
Tokens, however, have taken over the world of crypto assets: there are thousands of them.
Tokens are a special class of digital assets, unlike coins. They exist on a single blockchain, and there is no limitation to how many tokens can be created.
The creation process takes just minutes.
Tokens are not shares
Tokens can exist on the networks of projects such as Ethereum, NEO, Waves, EOS, and many others. There are even tokens based on Bitcoin, though their usage is relatively rare.
Initially, tokens had a very clear use case – to serve in the fundraising efforts of startups, in what became known as an Initial Coin Offering, or an ICO. Later, tokens came with the promise of “future utility”, that owning the token would be integral to using apps, or participating in an ecosystem of services and transactions.
But ICO projects were very careful to dismiss the notion that tokens were akin to shares.
Intuitively, some may have seen tokens as securities – but the fact is, no token issued until now gives any right to a share of the underlying business of the startup.
Projects like Tezos ran into trouble when US regulators decided their pre-launch token shared too many features with securities. Ethereum and EOS have faced similar difficulties.
None of those projects, in the end, were deemed to be unregistered securities.
A startup is not enough to support a token
But the notion that a token should be underpinned by something of value started to develop during the peak ICO season in 2017 and 2018.
It became clear that the value of a startup was not enough to support the market price of a token, or even convince investors they were buying a sound asset.
The simplest examples of a security-backed token are a relatively new series of asset- backed, dollar-pegged assets, such as Tether, or USDT, as well as TrueUSD (TUSD), and the upcoming Gemini Dollar, issued by the Gemini cryptocurrency exchange. In effect, owning these tokens gives the right to claim a certain amount of dollars, kept in an escrow account.
Other tokens use precious metals as backing, as in the case of DIGIX DAO, which has issued a gold-backed token, Digix Gold (DGX).
Tokenizing real-world assets is still in the testing stage, with projects such as token- based real estate, precious metals, commodity portfolios of technological metals and even artworks in development.
The tokenization of securities is still at an embryonic stage
Data, user attention, advertising clicks, media reputation – all those are also targets for some forms of tokenization.
But so far, the tokenization of securities is still at an embryonic stage.
There are many unknowns surrounding security-backed tokens. The discussion is still open on what form of ownership the buyer of tokens would have, and what rights would be given for holding a token in one’s wallet.
Crypto asset exchanges are also in discussion on how to trade tokenized securities. Gibraltar is seen as a potential destination for exchanges carrying security-backed tokens.
One of the roadblocks to tokenizing a company’s shares is the requirement to issue and register the securities, and list them on a security exchange. This process is much slower and more complicated than merely creating a token.
Tokenization will have to pass muster with regulators
The world of cryptocurrencies is yet to see an influx of security-backed tokens from fully legal projects with registered securities.
The idea of tokenization will have to pass muster with regulators, and the new types of tokens will have to appeal to the crypto community.
But an asset-backed token would be seen as a better store of value, and avoid the fate of tokens that recently saw their price peak and then crash.
A security-backed token, by default, carries the value of the underlying asset, and while the market price of the tokens may fluctuate, it would be more difficult to hit zero.
Tokenizing securities would have multiple benefits. For investors, having simple and immediate access to startups or established businesses worldwide would offer an unprecedented opportunity for portfolio diversification.
For businesses, it would be an additional source of financing.
A new image could emerge
Using token technology would also lure in investors from the crypto community, creating a new type of digital asset, far surpassing speculative coins, future utility tokens, or other schemes of value creation.
As startups continue to explore the opportunities that crypto asset technologies present, the previous image of cryptocurrencies as scams, pyramid schemes or attempts at unregulated fundraising should be forgotten.
A new image could emerge, combining the strengths of traditional securities and digital assets.
The mature market for securities and the fast and borderless technology of tokens could combine to provide a uniquely successful international market.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
