The Emergence of the Security Token

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Security tokens materialised in the market in 2018. The market is predicted to be worth US$10 trillion by 2020. Initial coin offerings (ICO), in contrast, raised US$5.6 billion in 2017. This year, industry experts are predicting that 2019 would be the banner year for security tokens.

Here are the reasons why security tokens are the future, and why they are here to stay:

What security tokens are

To further understand what security tokens are, it is first necessary to understand securities.

Securities are financial assets that can be traded. Some examples include stocks (or shares), bonds and debentures. Companies typically use stocks when raising money from various investors. In return, the investors receive dividends, interest rates or a share or the company’s profit in a specific form. When securities are transacted through cryptographic tokens, they are called ‘security tokens’.

Simply put, security tokens are crypto tokens that pay dividends and interest, share profits and invest in other assets and tokens, with the goal to generate profits for investors.

How different are they from utility tokens?

Security tokens differ from utility tokens in their intended use and functionality. Security tokens are used as investments. Users do not just receive dividends whenever the tokens earn a profit in the market; they also receive ownership of the company. Blockchain provides investors with a platform that can be used to create a voting system. In this way, shareholders have the ability to exercise control over the company’s decision-making process.

Utility tokens do not offer the same privileges as security tokens. Instead, they enable their users to interact with a company’s services.

Both types of currencies increase in value when the prices of the tokens appreciate in the market. Many people still find it difficult to differentiate them. To distinguish between security tokens from utility tokens, they need to apply the Howey test:

  • Is the token being sold as an investment?
  • Is there someone that the investors can rely on?

If the answer to any of the above questions is ‘yes’, the token qualifies as security.

Are security tokens here to stay?

Crypto enthusiasts believe that the demand for security tokens will increase in 2019. They provide investors with a range of financial rights, which include equity, dividends and buy-back rights. Security tokens offer an efficient way to fractionalise a single high-value asset. The emergence of Security Token Exchanges has also made it possible for an increase in security tokens.

Utilising security tokens are cost-effective since smart contracts eliminate intermediaries. Investors do not have to spend anything on administrative costs when they are buying and selling. In addition, these tokens are bound to be quickly adopted, since they lead to more liquidity and less administration.

However, security tokens come with several regulations and limitations on investments and how they can be exchanged. This means that they cannot be traded freely while adding security to the buyers. In addition, they are subject to many secondary trading restrictions, which inevitably affect liquidity. Appropriate regulation must come from the cryptocurrency community itself.