Top 5 Security Token Caveats All Cryptocurrency Investors Should Realize
Here’s What You Need to Know About Security Tokens
Anybody associated with the cryptocurrency sector will remember the 2017 market boom which saw the price of premier digital assets such as Bitcoin, Ethereum rise meteorically within the space of a few months. Now that the market has cooled off substantially, people are beginning to question the long term validity of altcoins, especially since they are prone to such heavy price swings on a near day to day basis.
However, one thing is for sure that the technology underlying all of these digital coins, blockchain, is very real and here to stay. Open-source, public blockchain ecosystems in particular have immense potential since they are dynamic and can evolve as per the needs/demand of the market they exist within.
Also, as blockchain technology continues to foster and grow, so do many of the applications that are designed atop such frameworks. Security tokens, in particular, are one of the core offerings that have emerged recently as a consequence of the unregulated ICO boom of the last 16 months. In recent times, security tokens have become extremely popular and are now on the verge of dethroning some of the traditional means of selling, trading, and managing asset-backed securities.
Not only that, security tokens are unique in the sense that they can now be used to tokenize real world assets— a market that is currently estimated to be anywhere around the $7 Trillion mark.
With that being said, there are still many common misconceptions about security tokens that continue to plague the digital asset domain. In this article, we will look at some of the core fundamentals regarding security tokens that every crypto enthusiast ought to know:
They Offer More Liquidity When Compared to Traditional Securities
Straight off the bat, we can see that one of the primary advantages of a security token is its promise of delivering higher liquidity. Not only that, they can also be used to ‘represent fractional ownership of an asset’ and can be easily procured via global security token marketplaces and exchanges.
Also worth mentioning is the fact that funds that offer security tokens allow investors to make an exit anytime they want, as opposed to conventional VC funds where investors are bound to conditions that force them to leave their funds with an intermediary entity for extended periods of time (with no favorable exit option before lockups expire).
Security Tokens and Cryptocurrencies are Different From One Another
To put it into the simplest terms possible, security tokens can be thought of as digitized traditional securities. What this basically means is that a security token simply replaces conventional paper stock certificates by providing investors with digital documents that are easy to maintain and secure. Lastly, it is also worth remembering that when people invest in security tokens, they are essentially betting on its underlying asset.
They are More Feature Rich When Compared to Traditional Securities
Another core advantage of security tokens is that they can be coded to manage a cap table. Not only that, they can also be automated so that they can execute certain events that are linked with the security itself without human interference. As a result of this, the overall investor experience is improved— primarily because the transactions in question are carried out almost immediately.
All of this is in stark contrast to the way in which traditional securities work, wherein the deal execution process is often plagued by the interference of many middlemen as well as ridden with a lot of paperwork (excel sheets, certificates etc.)
Security Tokens are Trustless
One of the biggest plus points of a security token is that every transaction associated with the offering is directly recorded onto its associated blockchain — which is a “trustless system”.
Therefore, there is no requirement for a single party/ entity to trust the other when executing a transaction via a security token.
They are Intrinsically Compliant
Owing to the fact that security tokens are developed using a number of different smart contracts, they are able to execute buy/sell transactions in a highly compliant, automated fashion. In fact, security tokens offer so much financial potential that even Jay Clayton, the Chairman of the SEC noted that, “Blockchain technology has incredible promise for securities and other industries.”
It is also worth remembering that within the United States, a number of security tokens are offered under the Reg. D exemption, which allows for any particular offering to have a maximum of 2,000 accredited investors.