Anecdotal evidence worldwide has been indicating that a security token wave is on the cusp of forming.
What makes this new breed of digital assets is one that seeks to comply with existing regulators, rather than to subvert. Security tokens are are programmatically designed to be compliant with relevant regulations.
In the words of influential crypto podcaster Anthony Pompliano:
“If cryptocurrencies like Bitcoin are considered ‘programmable money’ then you can consider Security Tokens a version of ‘programmable ownership.’”
With recent examples of assets being tokenized ranging from the St. Regis Aspen Resort, to a New York real estate fund, to a Picasso painting, to private shares of startup from Germany and Brazil, momentum is clearly favouring this nascent development.
We may even be witnessing the first movements of a transition from the ‘ICO winter’ to a ‘STO spring’.
Taken together, the features listed below form the foundation of the thesis that security tokens will see widespread adoption across numerous asset classes in the coming years.
Reduction in direct costs
Increased liquidity and market depth
Expansion of the design space for security contracts
In short, there are a whole host of benefits driving the security token proposition for mainstream adoption.
Let’s reframe it so things make a little more sense. Specifically, I want to look at the security token value chain aka ‘The STO Value Stack’.
Think of it like a hamburger (I’m unapologetically American).
At the bottom, you have Deal Flow Origination, which deals with how the supply and demand of capital gets matchmade. Here we discuss the difference between accredited investors and retail participants, and the type of asset being tokenized (real estate, commodity, bond, equity ownership, revenue sharing, etc.).
Once we’ve conceptualized what is being tokenized, we then need to talk about the Issuance Platform and Core Services accompanying the Security Token and its respective STO. We need to determine under what jurisdictions and how enforceable the token holder’s rights are to the underlying asset. We also need to determine how custodianship services are applied to the tokens in issue, and the custody of the underlying assets.
This is why STO platforms are a whole new breed of platforms as they have to deal with a myriad of questions and legalise surrounding the token. It is very important these questions are addressed upfront because things get very tricky very quickly when you’re partitioning a real asset with digital ownership.
Next, we need to address Auxiliary Services. These are the the programmatically managed corporate actions, such as dividends, voting rights, interest payments, revenue share distributions, ESOP, and token rights issues. Again, these are important when discussing the future of the tokenized asset, but are critical to ensuring that the process works and is fair.
At the top you have a Secondary Market for 24/7 trading.
This will be the domain of exchanges like tZero, who need to ensure that there is checks in place to partition market participants between accredited / non-accredited and nationality. Detest this all you want, but that’s how equity markets work, too, so this is not some new concept.
Exchanges also have to determine how capital gains are treated and how to report them for taxes. Additionally, they must program the settlement solution, be that fiat escrow or stablecoins, and figure out how to do that for a myriad of different customer types and nationalities.
Compare this to a crypto to crypto exchange like Binance and you can see there is much more complexity involved. Patience is the virtue right now because you don’t want exchanges and platforms rushing through areas of this value stack.
All four layers must work in tandem in order to ensure that STOs can function and truly represent a disruption of the existing system.
But think about the potential here for a moment. This is a democratization of one of the most principle elements of Wall St. and the Finance Sector.
Yes, it will take some time to build the infrastructure (we’re used to hearing that in crypto land), but we really are seeing a whole new industry being created here.
I’m truly excited for what that future might bring, and I do think we’re just getting started exploring it.