Introduction
Cryptocurrencies have been gaining popularity in recent years, especially with many crypto-millionaire stories popping up. However, this doesn’t apply to all crypto investors. According to a study by the Bank for International Settlements, 73-81% of users had likely lost money on their investments in cryptocurrencies. This study was based on crypto exchange app downloads and the price of Bitcoin at the time of download, assuming that users bought Bitcoin the same day they downloaded a crypto exchange app. Blockchain analytics firm IntoTheBlock has also reported that more than 50% of addresses are below the purchase price of their investments. The question then comes to mind whether these technologies can be implemented for risk-conscious investors. This is where security tokens come into play. Security tokens have the potential to revolutionize the traditional financial system by providing more efficient and cost-effective ways to trade real world assets and raise capital.
What are Security Tokens?
A security token is a type of digital asset that represents ownership of real-world assets (e.g. stocks, bonds, real estate, and intellectual property) or economic rights (e.g. a share of profits or revenue). These tokens utilize blockchain technology, which promotes transparency and fairness, as well as smart contract technology, which promotes innovation and efficiency. Security tokens are generally subject to the securities laws of, and supervised by the relevant regulatory authorities of, the jurisdiction where the security tokens are issued. They can be bought and sold on registered exchanges or through registered broker-dealers, just like traditional securities.
Fig 1: Typical Asset-Backed Security Token Structure
Security Tokens Ecosystem
The security token ecosystem is made up of the various players involved in the issuance, regulation, and trading of security tokens. This includes issuers, exchanges, custodians, regulators and investors.
Fig 2: Summary of Key Stakeholders
Issuers
Issuers are the entities that create and issue security tokens, through security token offerings (STOs). With STOs, issuers can tokenize their assets, without factoring in whether they are liquid or tangible. This allows asset owners to raise capital more easily and generate liquidity for their assets as they can be easily traded.
Hamilton Lane, CGS-CIMB Securities, SPiCE VC, and Novus Capital are among financial institutions that have already issued security tokens backed by real-world assets such as real estate, VC funds, debt, and equity.
Trustee Custodian
Custodians are financial institutions that hold and manage assets on behalf of their clients. They play a key role in the security token ecosystem by providing secure storage and transfer of assets. Issuers engage custodians to safehold their assets.
PrimeTrust, BitGo and BANKEX are some examples of custodian service providers.
Exchanges
Exchanges are platforms where security tokens can be bought and sold, like traditional stock exchanges which serve as a bridge between investors and issuers. They are responsible for the orderly settlement and trading of these tokens. Additionally, security token exchanges are responsible for the enforcement of applicable laws and regulations to ensure that all trading activities remain compliant. Exchanges can be a centralized or decentralized model.
At the moment, there are few regulated security token exchanges in the market. For example, DigiFT is the first decentralized security token exchange in the Monetary Authority of Singapore FinTech Regulatory Sandbox.
Investors
Investors are the buyers and sellers of security tokens, who may be institutions or individual retail investors. Investors in the security token industry are mainly made up of accredited investors and institutional investors. The status of accredited investors varies from country to country, based on one’s income level and net worth.
According to the Securities and Futures Act of Singapore, to be an individual accredited investor in Singapore, you have to fulfill at least one of the following criteria:
- Income in the preceding 12 months is not less than SGD300,000 (or its equivalent in a foreign currency)
- Net personal assets exceeding SGD2 million (or its equivalent in a foreign currency) in value, of which the net value of the investor’s primary place of residence can only contribute up to SGD1 million
- Net Financial Assets exceeding SGD1 million (or its equivalent in a foreign currency) in value
Regulators
Regulators ensure that security tokens comply with applicable laws and regulations. They set and enforce standards for market participants to achieve a level of investor protection. Through regulations, markets can be efficient and transparent, investors are treated fairly and honestly, and fraud can be prevented and investigated. These regulators are usually part of a government body and regulations can differ based on the country one operates in.
Conclusion
The security token ecosystem is seeing more institutional adoption with the likes of KKR and Hamilton Lane tokenizing their assets on the blockchain. Regulatory and security challenges are being addressed to provide a safe and secure framework for investors of security tokens. Security token has the potential to revolutionize the way traditional assets are bought and sold by increasing liquidity, reducing costs, and expanding access to a wider range of investors. As the technology and infrastructure for security tokens continue to develop, the potential applications are limitless.
關於 DigiFT
DigiFT aims to provide regulated decentralized finance solutions on the Ethereum public blockchain. We are operating the first regulation-abiding decentralized digital asset exchange where asset owners can issue blockchain-based security tokens and investors can trade with continuous liquidity via an Automatic Market Maker mechanism. We are a global outfit backed by well-established venture partners. The founding team originates from Goldman Sachs, UBS, Citibank, and Morgan Stanley, and has deep blockchain technology knowledge, having successfully developed digital asset exchange and products in the past.
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