Understanding the Distinction Between Tokenized Securities and Traditional Securities: STO vs IPO
Securities have long been a cornerstone of the financial world, serving various purposes such as providing capital to businesses, spreading risk among investors, and allowing for the exchange of value. In the traditional financial ecosystem, securities are commonly recognized as bonds, bills, and promissory notes, often backing stocks and shares. However, in recent years, a new form of securities, tokenized securities, has gained traction in the blockchain and cryptocurrency sphere.
What are Traditional Securities?
Traditional securities are the financial products issued in the real world, governed by regulations enforced by the Securities and Exchange Commission (SEC) and local authorities. These securities can be categorized into three main types: equity, debt, and hybrid. Equity securities grant ownership in an entity, such as a partnership or a company, offering shareholders certain rights and responsibilities. Debt securities, conversely, involve providing a loan that must be repaid within a specific timeline. Hybrid securities are a blend of both equity and debt structures, representing a more complex investment opportunity.
Dissecting Tokenized Securities
Tokenized securities, also known as security tokens, are a digital form of traditional securities, brought into existence via blockchain technology. These security tokens represent ownership of real-world assets such as real estate, stocks, and even commodities. Unlike traditional counterparts, tokenized securities are recorded and verified on blockchain technology, making them more transparent and secure. They are particularly useful for blockchain-based trading mechanisms, decentralized finance (DeFi), and crowdfunding through Security Token Offerings (STOs).
What is a Securities Token?
A securities token is a digital token that symbolizes the ownership of a tangible or intangible asset or security subject to a nation’s federal securities regulations. These tokens are designed to be issued on public networks such as Ethereum or Bitcoin, with built-in compliance features. Examples of real-world securities that can be tokenized include public equity, private equity, real estate, managed funds, exchange-traded funds (ETFs), and bonds.
The Future of Tokenized Securities
Securities tokens are anticipated to become the dominant force in the cryptocurrency market by 2025. As a result, financial regulators and entrepreneurs, such as Polymath and Harbor, are developing critical infrastructure to facilitate the transition from traditional to digital securities. In Australia, the Australian Securities Exchange (ASX) is even exploring the creation of its own 'private blockchain' to tokenize securities for the public equity market, much like a private 'intranet' where only authorized users can communicate.
The Benefits of Tokenizing Securities
The shift towards tokenized securities offers several advantages, including enhanced automation and reduced administrative costs. Unlike paper-based ownership records, digital ownership can be programmed and automatically enforced. Tasks such as dividend payments, vesting periods, distributions, and shareholder voting can all be automated using code. This not only simplifies the process but also significantly reduces the need for human intermediaries, thereby cutting costs and improving governance.
For instance, issuing equity through tokenized securities could become as simple as clicking a button on the internet. As blockchain technology matures, the capabilities of these tokens will extend beyond basic functions, such as dividend payments, to include more complex financial instruments like convertible debt or even credit default swaps, with contract terms hardcoded into the token itself.
Conclusion
Given the rapid advancements in blockchain technology and the increasing regulatory acceptance of tokenized securities, the future of financial innovation looks promising. The shift towards tokenized securities represents a significant evolution in the financial world, offering greater accessibility, transparency, and efficiency. With the support of established platforms and the growing interest from both regulatory bodies and investors, the transition to tokenized securities is well on its way.