The Tokenization Of Everything
It may be hard to believe now, but the securitization of non-liquid assets – venture capital funds, real estate, precious metals, currency, art, sports teams – is likely to be one of the biggest stories of 2019 and beyond.
In fact, it’s likely to reshape how investors value their assets and how they think about them going forward.
The driving force behind this market upheaval is the rise of cryptocurrency and Blockchain. To date, both technologies have been the provence of early adopters and speculators, but they are about to move from the perimeter of our financial lives to permanent fixtures on Main Street.
Because crypocurrency and blockchain make it cost-effective to securitize common assets – to turn anything of real value into a marketable security by creating a digital unit of ownership known as a security token.
Instead of owning a Rembrandt outright, for example, tokenization means the owner could offer digital shares of ownership in a masterwork painting. The fractional owners would benefit from buying or selling their digital shares to take advantage of rising or falling prices. As a digital security, it can be quickly and easily traded online. Think price transparency every day, instead of a Christie’s auction every blue moon.
We believe the tokenization of everything will bring to common assets the benefits Wall Street long ago engineered for other asset types, such as Commercial Mortgage Backed Securities (CMBS), syndicated loans, student loans, auto loans, and countless other assets.
The Growing Importance of Security Tokens In the Crypto Market
As more regulatory clarity in the crypto space emerges there is a huge possibility of institutional players adopting security tokens considering the security and liquidity they offer.
Since its inception, ‘Security Tokens’ has been a matter of big debate and controversy in the crypto market. The growing involvement and scrutiny by the regulatory bodies in the crypto space have got them into the limelight again. Currently, Security Tokens just make a very small percentage of the ICOs. However, some experts believe that, and not utility tokens will help to trigger institutional investor participation the next year.
Security Tokens and Utility Tokens
The major difference between security tokens and utility tokens is their functionality and the intended use-case. Security tokens majorly serve as investments. These tokens are the ones that share profits while paying interest and dividends to the token holders. It could be in the form of giving new tokens every time the company makes a profit.
Security Token holders are liable to get ownership in the company. Moreover, blockchain technology enables a voting system that allows investors to exercise their rights in the company’s decision-making process.
Thus, security tokens are more like digital assets deriving its value by trading external assets. As a result, the tokens are subject to federal laws governing securities.
On the other hand, Utility tokens allow access to the company’s services and products. Hence Utility tokens are not said to be investment tools. Neither do they give its users the ability to control decisions made in the company. In simpler terms, utility tokens are like user tokens and app coins.
The Growing Demand of Security Tokens
So far, this year of 2018 has seen regulatory bodies intervening in the crypto market trying to streamline several operations in the unstructured cryptocurrency market. Moreover, there is a growing regulatory uncertainty around the ICOs. Currently, the security tokens contribute to a very small percentage of ICOs. Next year in 2019, the scenario is likely to change.
This is because security tokens provide a bridge between the traditional finance market, the venture capital firms and the emerging blockchain technology. Although utility tokens currently dominate the ICO market, their utility is limited. In most of the ICOs, utility token owners cannot use it beyond the desired platforms. Hence venture capital firms usually stay away as utility tokens are difficult to convert into cash in most of the cases. Security tokens provide a fundamental solution to this.
The inherent structure of security tokens is that they can represent ownership in any asset. This can be a venture capital firm or a tech startup. As a result, security tokens give investors the right into a particular fund or a company. The ability of security tokens to provide easy liquidity to its investors make them a preferred choice for institutional players, even if they come under the regulatory oversight.
Over the next one year, we expect a more stable regulatory environment in the crypto space. Global institutions like the IMF and the FATF are working towards the same. We thus expect some healthy measures from these agencies ensuring the safety and security of investors.
Once regulatory clarity emerges, security tokens will usher through the crypto market.
In spite of their relative youth, security tokens have been lauded as the inevitable future of the crypto and blockchain industry. While some pundits would beg to differ, security tokens moved a step closer towards global adoption on Thursday, as it was revealed that Bithumb has plans to launch a cutting-edge U.S.-based platform.
South Korea’s Bithumb Joins Hands With US-based SeriesOne
Per an exclusive report from Yonhap News, a Seoul-based news outlet, Bithumb, a leading cryptocurrency startup in South Korea, has just inked a strategic deal with SeriesOne. The unexpected deal, which was relayed by anonymous industry sources, reportedly outlined a collaborative effort between the two aforementioned entities that would see SeriesOne, an America-based crypto-centric crowdfunding portal, help Bithumb establish a platform in the United States.
The platform, which will be backed by “technical support” from SeriesOne, will reportedly be hinged on the trading of security tokens, which are blockchain-based tokens that mirror real-world assets deemed securities by financial regulators.
Commenting on the apparent move, an official from the aforementioned South Korean cryptocurrency platform told Yonhap:
“SeriesOne actively sought to strike a deal with Bithumb after assessing it as the most suitable partner… Bithumb will ramp up efforts to develop into a global financial firm as the blockchain-based asset tokenization is expected to spread globally down the road.”
According to those familiar with the matter, SeriesOne is eyeing to launch the security token platform, which remains unnamed, in the U.S. during the first half of 2019. While SeriesOne is a lesser-known startup in the broader cryptocurrency ecosystem, many have high hopes for the partnership, as the crowdfunding firm has been accredited by the Securities and Exchange Commision (SEC), the de-facto regulatory face of America’s financial markets.
On the other end of the partnership, SeriesOne has established a South Korean subsidiary, presumably with Bithumb’s help and local expertise, to issue and offer security tokens within the Asian nation.
This move comes only weeks after Bithumb and One Root Network unveiled their globally-focused decentralized exchange (DEX), which allows consumers to issue crypto-to-crypto trades without routing their information through a centralized authority or body.
The Push For Security Token Adoption
For the uninitiated, as alluded to earlier, security tokens are a recently-established genre of cryptocurrency that allows for retail, institutional, and merchant investors to hold securitized assets, like shares, bonds, and options, via blockchain technologies.
While the classical management system for securities is still functional, the sentiment is that over time, as crypto assets continue to garner traction, consumers and corporations alike will seek to make legacy programs more effective, cost-efficient, decentralized, and easier to track by situating said programs on blockchains and similar contemporary mediums of data storage.
And although security tokens have yet to see worldwide approval, this sub industry has seen its fair share of positive developments in the past few months.
In early-September, David Sacks, Paypal’s former chief operating officer, was revealed to have joined the advisory board of 0x, the company behind the well-known decentralized exchange protocol that shares its name. As per a Fortune report, Harbor, a compliance platform aimed at the security tokens space, will be working with 0x alongside Sacks, who is invested in Harbor. Speaking on the partnership 0x CEO Will Warren, who is a die-hard for tokenized securities, expressed his excitement for this emerging cryptocurrency type, stating:
“In the next five years, there will be a massive shift away from securities being in closed systems that are highly regulated and hard to access. It will be a much more open system where trading location is less important. But for this to happen, there needs to be a security token tech stack.”
“Tokenized securities are bridging the gap between traditional financial markets and crypto markets because they are aligned with everyone’s interest. Regulators want to protect the investors, investors want their assets tradable, and crowds from all over the world want to invest in the most promising startups at an early stage.”
So make no mistake, although security tokens may seem like nothing more than a catchy buzzword, this innovation, which is still getting fleshed out, could be the sole catalyst that pushes the cryptocurrency market to new heights.
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Security tokens are getting a lot of attention, especially after several issues with regular ICOs are beginning to surface and investors are seeking more secure opportunities. With regulators willing to give crypto assets a fair chance, security tokens seem to be the future of crowdfunding and digital assets.
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