Security Tokens & Trends that Keep Influencing Their Growth
Blockchain technology has been developing at an exponential rate since it came into limelight. It is the new and the most interesting thing to explore and dabble with in the world of technology. Blockchain along with cryptocurrency has opened up a brand new avenue for investment for all interested. Governments, businesses and even individuals are looking for ways to get the best out of this technology and the existence of security token which is a certain variety of utility tokens is an essential part of it.
The present situation with security tokens
Since the first half of 2019 majority of the security tokens that have been launched are for equity in real estate, private company shares, art pieces and collectibles, private equity funds and other forms of illiquid assets. Most of these security token offerings have shared on a blockchain-enabled system. However, it is not fully ready to trade on the liquid secondary market. The digital securities that are powered by blockchain are more influential because they unite:
- The programmable digital assets by using smart contracts
- Financial payment in the same system in the form of digital asset creating efficiency in settlement
- An immutable or tamper-proof information-rich ledger that adds transparency to the asset, valuation and the transactions that take place
The essential components for digitized securities
For complete asset digitization of financial ecosystems and capital markets and to reap its benefits an infrastructural renovation is needed. The technology required for the creation of token securities is just a part of it. Given under are the three vital components that are needed to create digital securities:
- The first component is custody. For total compliance of security-related regulations, one requires custody solutions that offer storage and proper management of digital assets across different blockchains. All of these solutions should be registered as accredited custodians so that one can hold the digital securities in place of the clients. Besides that, they should also offer investor safeguards and proper access controls.
- The second component is blockchain-enabled payment options. For one to fully utilize the efficiencies, minimize the risk factor and enable automation of distribution via blockchain, it is of utmost importance that the clients have a reliable payment channel at their disposal. That can be fulfilled by cryptocurrencies as well as stable coins which are crypto assets that are backed by fiat currencies or any kind of hard asset.
- The third and final component is the secondary market for the trading of tokenized assets. This reduces the illiquidity that mostly remains associated with such assets.
As per the present trend, the above-mentioned components are enough to create and manage an ecosystem for digital securities.
Detailed analysis of all 3 components in the current context
If we go back a few years, most of the digital asset custody products were directed towards retail crypto traders. Due to this, the management of assets fell upon the end-user. That system worked well with the unregulated items but in the case of digital securities those demand a custodian that is qualified to manage the assets. Besides that, custody solutions should also come with features such as multiple party access and approvals, spending limits, etc. As the market for digital securities grows, there will be an increase in enterprise-level custody solutions and a demand for qualified custodians to facilitate the infrastructure of new digital security.
Blockchain-enabled payment options
One of the great things about adopting tokenized securities is that it enables you to conduct instant transactions on a blockchain network. The operational efficiency of the process frees the capital expenses to utilize it in more constructive developments. In case the investor is using fiat currency for purchase or trade of security tokens then the efficiencies might get lost. When integration happens with the traditional banking and transaction system, it increases the time of settlement and hinders automated distribution.
Cryptocurrency, on the other hand, optimizes the efficiency of the blockchain application. However, the instability of cryptocurrencies like Bitcoin and Ether, they are not the best choice to buy security tokens, because those are meant for long term investments. To counter that, stable coins are a viable choice since these are pegged by a fiat currency or hard asset. The experts in this field are expecting that with time the central banks will start launching their cryptos, and that will directly influence the growth of the digital security market.
The third and last segment of this article is about regulated exchanges for security tokens. This is an essential requirement to boost the liquidity of assets on the blockchain system. Before listing the security tokens the exchanges have to make sure that those are registered under proper jurisdictions. Besides that, those should also be able to perform for KYC and AML verifications for more transparency. With the growth of volume market capitalization etc. of blockchain issued securities, there will be an equal demand for secondary markets that are in compliance with the trading norms and can provide liquidity for digitally tokenized securities.
There’s already a lot of work going on in this area of blockchain and it has already shown promise for the future of digital token securities.