Security tokens, crypto tokens that are backed by assets like
equity or commodities, seek to combine the traditional benefits of these types
of backed assets with the efficiency of blockchain-powered cryptocurrencies.
“The best analogy
[for tokenized securities] is the transition from email to snail mail,” said
Josh Stein, the CEO of private securities blockchain startup Harbor, in an interview with Fortune. “You can type out a written communication, print
it out, put it in an envelope, address it, send it, and wait two to three days.
Or you could hit send on an email. The content is the same, but by putting an
electronic wrapper around it, you can send it faster, cheaper, and easier.”
The Problems With Unregulated Tokenization
When people invest in a traditional asset like
a stock, for example, they are essentially buying part of the underlying
company that offers it. With that can come certain voting rights, dividends and
an assurance that the asset’s value is tied to the success of that company.
In cryptocurrency, however, the current market
is almost entirely speculative, with very little framework for the ability to
properly evaluate a project or company’s market cap or price valuation. Many initial
coin offerings (ICOs) and cryptocurrency projects have reached significantly high
overall market caps, with little more than a white paper. Many of these ICOs
and projects have also been found to be fraudulent. But even if a company is
legitimate, there are often cases in which coins/tokens are the talk of the
town for a small period of time and then quickly disappear from the spotlight,
with their prices following.
The Problems With Traditional Markets
Stocks, bonds, real estate and other
traditional assets are still more effective and “safe” when it comes to the
above-mentioned problems in cryptocurrency. But there are also many
Investors are not currently able to trade or
send their assets from person to person. Those assets are tied in funds,
brokerages, traditional exchanges, etc. It can be difficult to move them if
There can also be a liquidity problem. For
instance, very large assets may not attract as many investors as those that can
be quickly and efficiently divided with something like blockchain technology.
Also, the traditional model encourages companies to raise money through venture
capital at their earliest stages, as opposed to offering that early investment
opportunity directly to institutional investors who may have been able to
promote growth through an electronic, decentralized sale.
The Best of Both Worlds: Tokenized Securities
Blockchain technology can be used to create
security tokens, providing the ability to sell “fractional interest” in large
assets. With tokenized securities, investors are able to send cryptocurrency and
receive a token that is backed by real-world value. Tokenized securities also
provide an easy avenue for fractional investment in real estate, which would
bring significantly more liquidity into that market with a larger pool of
Tokenized securities seem like the logical
solution to pair the best of blockchain technology with the proven and
effective traditional financial system.
There are many companies that are currently
looking to make tokenized securities a mainstream reality. These include
companies like Polymath, Securitize, Swarm and Desico.
Tokenized securities may very likely be the next
big trend in finance, providing a whole new level of liquidity and purchase
potential for all types of investors.