How security tokens will change traditional finance?

November 11, 2018
Darya Karatkevich

The mainstream financial industry has remained skeptical of blockchain tech, but is slowly starting to realize its benefits. Security tokens are of particular interest to firms looking for a stable, trustworthy platform. Banks, exchanges and payment firms are already testing implementation, working on new products, and applying for patents based on blockchain technology.

security tokens and traditional finance

But what exactly are security tokens, and what makes them different from what we are seeing now across blockchain transaction networks? They are digital tokens, representing ownership of an underlying financial asset or security, subject to nation-state’s federal securities regulations. Popular public networks like Bitcoin and Etherium could build in the necessary compliance features, but it’s likely to be all new platforms with the most security.

Examples of securities include Stocks, Private Equity, Managed Funds, Real Estate, Exchange Traded Funds, Bonds, and so forth… According to some studies, security tokens are poised to become the bulk of the cryptocurrency market by 2025. This is prompting financial regulators and entrepreneurs to work on critical infrastructure to map securities to digital tokens. In Australia, the ASX is working on a ‘private blockchain’ to tokenize securities for Australia’s public equity market. It will work much like a private ‘intranet’ would, where only users from inside an organization (in this case, inside a country) can access the network.

“Tokenization dramatically expands the ability to create new financial products,” says Luc Falempin, CEO of Tokeny, a blockchain company specializing in streamlining token purchasing and management. He went on to say that the financial sector will be disrupted far more than many realize due to the use of security tokens.

“The net effect of tokenized securities is to increase the liquidity of the underlying assets. Using an asset tokenization platform is becoming the de facto method to raise capital by issuing blockchain-based ownership claims,” Falempin said.

#1 Laws will be embedded in the code itself

One of the key ways blockchain technology and tokenization lends itself well to the securities market is that regulators can mandate laws and standards embedded in the code of the tokens. Currently, industry watchdogs have to keep track of transactions, regularly audit them, and take action when someone falls afoul of the regulations. This will be a thing of the past, as a security token will not allow the rules of the system to be broken.

#2 Trading will be possible 24/7

Trading can also take place around the clock with digital tokens. Major securities markets around the world generally only operate during normal business hours in the work, and are closed on weekends. Settlement for transactions typically is only during business hours, and usually takes multiple business days to be completed. Security tokens would make trading and settlement possible 24/7, globally.

#3 Threat of theft will be eliminated

Another feature of a security token-based market is trustless ownership. Assets will no longer need to be held by third parties, and owners would be empowered to hold the asset online, with a secure wallet only they can access. Rules about who the asset is traded between can be stored right in the code of the token itself, all but eliminating the threat of theft.

#4 Fractional ownership of any asset will be established easier

Fractional ownership is another possibility of a tokenized system. For example, say you wanted to sell some equity in your home, security tokens would allow you to directly offer shares. Also, it would make it easier to have fractional ownership in a business, commercial real estate, artwork, or any high-worth asset.

#5 The financial network will be securely globalized

Developers are working on solutions to facilitate the trading of securities on public networks such as Ethereum. This will allow current public blockchains to also serve as infrastructure of a global financial network. Standards must be developed to ensure interoperability so that a smooth global transaction network is maintained. Smart contracts could automate execution of trade deals, use stablecoins (set to mirror the value of USD or Gold), and implement cryptography to allow uses to communicate securely.

#6 Real-time reporting will become a standard

The very nature of blockchain tech means that all information in the chain is visible to all users in real time. This means that financial reporting data, currently published in things like quarterly and annual reports, can now be accessed in real-time by users. This eliminates the need to compile this report, and speeds the information flow to users.

#7 Complete financial transparency will become available

As more services adopt distributed ledgers, public reporting will evolve from static disclosure in PDF documents to real-time web-based disclosure, completely revolutionizing financial transparency . This will have the net effect of forcing public companies to become more accountable and transparent, at the same time streamlining how investors and shareholders access that information.

It will not be long before the securities market responds to these new technologies and the benefits they provide. Circle Internet Financial Ltd. already has announced plans to register as a brokerage and trading venue with the Securities and Exchange Commission (SEC). The goal is to allow investors to trade tokens which are classified as securities.

Whether or not you choose to believe it, these technologies will dramatically change the traditional finance sector. The disruption this will cause to legacy practices will completely alter the landscape of the securities markets as both public and private blockchains are leveraged to automate and secure financial transactions and solve current financial problems. And it will all happen in a fraction of the time and at a fraction of the cost.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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