A Look Into The Security Token Mega Trend

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Since the beginning of 2018, the prices of all digital assets are experiencing heavy pressure to the downside, with some coins in the top ten losing up to 90% of their value. While many investors are hoping for salvation in the very near future, others fear that the market needs an impactful event as a catalyst for a new bull run that could bring digital assets to new all-time highs.

Adoption by big institutions is often seen as essential for initiating bullish momentum once again. A Bitcoin ETF has been frequently declared as one possible trigger mechanism for an immense uptrend. However, there is another potential catalyst that hasn’t received as much attention as the famed VanEck ETF: security tokens.

Benefits of tokenizing securities

By distributing stocks in the form of a security token, companies benefit from countless new features including improved liquidity, distribution, control and investor relations.

On the one hand, board members and directors will be content with the possibilities of customizable trading settings, automated whitelisting processes and the tracking of their shareholders. Especially the last point is undoubtedly a great enrichment for the management side, as it provides enhanced opportunities to nurture relationships with their investors and to get an improved overview of them.

Elseway, shareholders benefit from eased and more transparent stock market classics like dividend payouts, votes, and reports, but also blockchain related formats like an additional utility. Possible utilities could be memberships, access to products and discounts, among others.

Apart from tokenizing stocks and bonds, the blockchain world also has plenty to offer for real estate and fine art. These asset classes traditionally suffer from low liquidity and big amounts of paperwork. Digitalizing illiquid assets would undoubtedly pay off for every investor and institution in the market.

Big players in the market

Recently, the blockchain startup Open Finance announced that it just launched the first fully US regulated security token exchange for retail and accredited investors.

Billion dollar company Overstock is also showing a massive interest in getting involved, as Overstock subsidiary tZero is aiming to become the biggest security token exchange in the United States. The company held it’s STO in August 2018 and raised about $160 million.

Overstock CEO, Patrick Byrne, has also been very vocal about the cryptocurrency Ravencoin. Ravencoin is a blockchain specifically dedicated to the issuance and transfer of assets. The cost for issuing an asset on the Ravencoin blockchain is 500 RVN, which are burned after the asset has been created.

Binance and OKEx, the biggest cryptocurrency exchanges by volume, both recently announced their plans to build security token exchanges in collaboration with Malta’s main stock exchange MSX. Furthermore, the popular mobile app and exchange platform Coinbase also disclosed its interest in building their very own security token exchange a few months ago.

Switzerland’s biggest stock exchange reported launching a new platform with an implementation security token trading. Bakkt, another upcoming crypto exchange owned by NYSE parent ICE, recently tweeted about assets in a tokenized world. Blockchain enthusiast around the world is currently speculating on a tokenized securities exchange led by the stock market giant ICE.

Pending challenges

Unfortunately, the highly complex legislative in jurisdictions like the US, which inhere a great variety of rules and laws dedicated to securities, became a big hurdle for a wide adoption of security tokens. A main area of focus is the whitelisting process, as the U.S. Securities and Exchange Commission (SEC) traditionally excludes non-accredited investors from participating in IPOs. This rule, of course, applies to Security Token Offerings.

Brokers and advisors who want to engage with the security token space are in need of a proper whitelisting system, where they are able to track clients that are qualified to buy securities. Exchanges usually deal with many different jurisdictions and often need to take serious efforts to maintain their whitelists and satisfying their compliance requirements. Issuers lack a registry system that allows them to track shareholders and control their securities.  

A list of shareholders (a registry) is required for corporations registered in Delaware, Caymans, Singapore, Hong Kong, UK, EU, Switzerland, and almost any other corporate venue. Due to the fact that the security token space is still in its infancy, there is currently no solution on the market to solve the whitelisting and registry issue.

Aboveboard, which recently became the first company to distribute corporate stock on a public blockchain, is working on a registry software that should handle the whitelisting process and tracking of the shareholders. Furthermore, the company aims to implement all the benefits of managing security tokens as listed above.

With the Aboveboard registry, exchanges get the ability to accept and redeem securities from many different jurisdictions. In addition, exchanges are able to track qualified investors with internal accounts and an internal transfer agent by using their own whitelists and a simple API. Issuers get a control panel for issuing securities, distributing them to an “affiliate” whitelist of insiders, controlling who is allowed to receive the security, replacing lost securities, and turning transfers on and off. Issuers can also request distribution to brokers and advisors. Aboveboard qualifies them and send advisors and brokers qualified leads.

Issuers, as well as brokers, exchanges, and advisors are currently invited to sign up for the aboveboard shareholder registry.

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