Security Tokens – Blockchain Technology in Traditional Financial Markets
By Sean LaFlamme
June 15th 2018
Financial technology has made some amazing strides in the last ten years. This advancement would not have been possible without blockchain technology. Bitcoin became the first decentralized digital currency using open source software in 2009. The next milestone came when the Ethereum network launched in 2015. This allowed for smart contract execution. The newest, most exciting, and revolutionary advancement will be the emerging market of security tokens.
A security token is a digital token backed by physical, tradeable assets. These security tokens are financial securities representing shares of equity in traditional assets, startups, and venture funds. Security tokens are fully compliant with applicable government regulations and traded via a blockchain. In contrast, a utility token generated by a traditional initial coin offering gives the buyer no equity in the company, but allows the user to use some resource of the company in the future. In some cases these were designed to avoid Security and Exchange Commission (SEC) regulation. They are not designed as investments. As a result, fair price points are overly ambiguous as these utility tokens do not represent ownership in the company.
The advantages of tokenized securities over traditional financial instruments, such as stocks, are numerous. In the traditional financial system the issuer of the security does not have a ledger that indicates which individuals own which share of equity. The ledgers are kept by trusted third parties. Examples of these trusted third parties include large financial firms such as Goldman SachsTM, FidelityTM, ect. Security tokens eliminate the need for trusted third parties which allows for greater control of the asset by the individual. This greater control by the individual will enable more liquidity in the market because it is a more efficient system.
Tokenized securities also give companies a new way to raise capital. Harnessing the power of blockchain technology, Security Token Offerings (STO’s) will allow companies to find buyers in a way that is cheaper, more efficient, and transparent in comparison to initial public offerings. At the same time, investors can expect that their ownership stake is preserved on the blockchain ledger with the same rights as a traditional shareholder.
Security tokens are a natural bridge between crypto-markets and traditional financial markets. It has been estimated that the securities market is 40 trillion dollars. Companies are starting to take notice, and leaders in the field are already starting to emerge.
Trading security tokens will occur on alternative trading platforms. These platforms will be introduced to the market very shortly. TzeroTM is an exchange that will match buyers and sellers of security tokens. TzeroTM plans to launch their alternative trading system which will allow investors to buy and trade security tokens without depending on broker-dealers. CoinbaseTM, by far the largest cryptocurrency exchange in the world, is also attempting to register with the Securities and Exchange Commission as a broker-dealer, which would allow them to list Security Tokens.
Companies or individuals interested in tokenizing their assets will have to decide blockchain to use. With an unbelievably large market, there is room for multiple blockchains for the first big wave of security tokens. Blockchains include Ethereum, Ravencoin, EOS, and Cardano to name a few. Similar to bitcoin, Ravencoin is an open source protocol. Ravencoin is a use case specific software protocol which allows for the creation of tokenized securities on a secure blockchain. Ravencoin will also allow voting, dividends and messaging. Ravencoin will also allow users to create tokens with any rules or properties their creators give them.
Security Tokens allow for a hybrid financial product combining crypto-markets and traditional financial markets, ultimately improving both. Considering the real use cases of this new innovation, and the ability blockchain to eliminate the need for trusted third parties, security tokens are sure to have an impact on financial markets in the coming years.
Disclosure: I am/we are long Ravencoin.