The cryptocurrency market had quite a year in 2018 – from the 85% from its January peak, to China’s continuing regulatory crackdown, to another sharp drop this past November. CoinWatch tracked it all, the bad and the ugly, as Bitcoin (BTC), Ripple (XRP), and Ethereum (ETH) led the way down from the heights. By all appearances, the New Year will not be kind to cryptos.
Appearances can be deceiving. There may be a new hope for crypto coming, sooner than you think. A new product, based on the Wall Street stock markets, has just hit the blockchain trading networks, and it’s worth a closer look.
Enter Security Tokens
A crypto trading platform based in Estonia, DX.Exchange, on January 7 launched a new blockchain product: security tokens, backed on a 1:1 ratio by equity in several major American-based companies. The concept owes something of its inspiration to stablecoins, the blockchain-based cryptocurrency offerings pegged to traditional currencies, usually the US dollar.
DX offers numerous advantages to trading stock as digital blockchain tokens, starting with the security of the blockchain system itself. In addition, like cryptocurrencies, security tokens are tradable 24 hours a day, seven days a week, even when the markets are closed. While one security token will be equivalent to one stock share, traders are able to deal in fractions of tokens – again, as with cyrptocurrencies. Finally, offering stocks as security tokens will make the US equity markets more accessible to traders overseas.
Among the companies whose stock DX is offering as security tokens are Google, Amazon, Apple, Facebook, Netflix, and Tesla. Each token corresponds to one share in the company, so the token’s value is determined by the share price of the backing stock. Ownership of a security token is equivalent to ownership of a share, and like the stock, entitles the trader to company’s regular dividend payout.
A New Way to Trade the Stock Market
Shifting traditional securities to a blockchain-based trading system could open up a new paradigm for investors, especially day traders or small-time market players. The option to trade in fractional tokens will bring expensive stocks, like Amazon or Google, within reach of those smaller players. The tokens’ equity backing makes them a slid investment, less prone to the notoriously high volatility of ‘traditional’ cryptocurrencies like Bitcoin.
Describing his company’s move into this niche, and the advantages is offers, DX’s COO, Amedeo Moscato, said, “The crypto community has been talking about security tokens for well over a year now without much progress, so we think the impact will be huge. By tokenizing stocks of some of the biggest publicly-traded companies like Google, Amazon, Facebook and more, we are opening an untapped market of millions of old and new traders around the globe cutting out the middleman.”
Another advantage of security tokens over cryptocurrencies is lies in the realm of regulation. Since its inception, blockchain cryptocurrency trading has developed a ‘Wild West’ reputation, derived from its volatility, its independence of traditional financial markets, and its simultaneous transparency to traders and invisibility to regulators. The blockchain ledgers provided both security for the trades and a verifiable trading record, while the cryptocoin tokens – Bitcoin and its ilk – were so new that traditional regulators like the SEC did not know what to do with them.
Both an Equity and Crypto Token
Security tokens short circuit that unruly reputation, by maintaining the best parts of blockchain and putting the ‘coin’ under the regulator’s eye. DX has already said that its digital stocks are classed as derivatives, based on the underlying equities, while American regulatory authorities are suggesting that the new tokens are deemed to be securities, and thus will fall under the rubric of the SEC.
A regulated crypto token, backed by a trusted asset and overseen by known and predictable regulatory authorities, would quickly bring order to the blockchain trading universe. Looking into that future, DX.Exchange’s CEO, Daniel Skowronski, said, “We believe that this is the beginning of the traditional market’s merge with blockchain technology. This is going to open a whole new world of trading securities, old and new alike.”
Author: Michael Marcus
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.