Security Token: Institutional Path to Cryptocurrency Mass Adoption
Initial coin offerings (ICOs) have raised over $20 bln this year, and are completely changing the way startups gain access to capital, especially for those in the early stage. In the ICO process, startups issue their own digital tokens and exchange them with by contributors worldwide for other cryptocurrencies like Ethereum or Bitcoin. Tokens are accordingly classified by their use cases and functions, the most common of which dichotomizes them into utility or security tokens.
A key concern around utility tokens focus around the fact that in many instances, they are actually security instruments masquerading as utility tokens, in efforts to avoid compliance around their issuance. It was found that majority of the projects currently listed on Coinmarketcap fall into this category. Utility tokens typically represent the future access to a project’s product or service. While true utility tokens are not designed as investments by nature, many people still choose to invest in the hope of quick and powerful returns on their investments.
However, the value of utility tokens largely depends on their utility, and they are highly volatile due to the speculative nature of the cryptocurrency market. Without real inherent value and the lack of regulatory clarity around the token issuances ICO, it is difficult for institutional money to flow into the crypto market.
What About Securities Tokens?
Security tokens are essentially financial securities with a digital wrapper around them to enable blockchain-based trading of such tokens. Security tokens can be backed by real-world assets such as LP interest in a fund or a trust, a member share in an LLC, or commodities
Issuances of this sort are largely governed under regulations around traditional capital or money markets. By this token (pun intended), security tokens have the potential to open up a gateway for institutional players, ushering in a new wave of traditional liquidity into crypto markets. However, there are some regulatory complexities around issuance, secondary trading and ownership transfer of such assets, owing to nuances in compliance standards across jurisdictions.
Why Tokenize Assets?
Global stock markets are closed more often than they are open. Take the Hong Kong Stock Exchange (HKEX) for example, HKEX open at 9:30 am and close at 4:00 pm on weekdays. On the weekends, HKEX is closed for up to 65 hours, including Friday evening. In contrast, the bell will only ever ring once for cryptocurrency markets. Upcoming security token exchanges will most likely adopt this practice, enabling continuous trading at all times.
On a bigger scale, the crypto market is borderless. In traditional trading venues, geography and markets in which they operate in mean completely different pools of liquidity, among other differences.
With security tokens, we have the opportunity to potentially combine these silos into one global pool, opening up new investment opportunities and price discovery for across the globe. Above that, blockchain protocols can ensure that nuances in regulatory requirements in different jurisdictions are met, and each participant and trade executed in a compliant way, by default.
Democratization of real estate investment and ownership access, a high-yield but exclusive asset class
In traditional markets, you cannot buy or own a fraction of a share. Fractional ownership is especially useful for other asset classes like real estate. Hong Kong was recently ranked as the most expensive housing market in the world for the seventh consecutive year, making real estate in Hong Kong one of the most lucrative alternative investment.
There are thousands, if not millions of people who would want to purchase a flat in Hong Kong but the cost is too expensive, which significantly limits the total addressable number of buyers in the housing market. On the blockchain, fractional ownership of a traditional asset can be achieved through asset tokenization. An HKD 50 mln housing flat can now be sold at HKD 1 mln worth of tokens to 50 buyers in the market.
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