Introduction
Issuers are a major component in the security token ecosystem, offering their assets to be tokenized onto the blockchain. They are responsible for ensuring that the security tokens minted comply with all relevant laws and regulations. They are also accountable for providing transparency and information to token holders regarding the underlying assets and the performance of the security tokens. In this article, we will explore the role of issuers and discuss the key considerations for potential issuers looking to join the space.
Types of Issuers
Issuers are the companies, organizations, or individuals that create and issue security tokens. They can range from early-stage startups to established publicly-traded companies. Security tokens enable issuers to issue tokens backed by most assets, including traditionally illiquid ones. Real estate, precious metals, fine art, wine, debt instruments, equity, and even carbon credits are among assets that security tokens can represent. We have analysed some exchanges in the previous articles on where we mentioned some of their token listings, so do check that out!
Table 1: Selected examples of the different type of Issuers, accurate as of 14 February 2023
There are several types of issuers within the security token ecosystem:
1. Government bodies are exploring the potential of issuing security tokens. The Deputy Prime Minister of Singapore mentioned at the Opening of the Point Zero Forum in 2022 that Singapore will facilitate live experiments through regulatory sandboxes, including testing the feasibility of DeFi and asset tokenization. Additionally, just last week, the Hong Kong government issued HKD$ 800 million (USD$ 100 million) of tokenized green bonds under its Green Bond Programme. The bonds were underwritten by four banks and priced at a yield of 4.05%.
2. Traditional financial institutions have been expanding their digital assets team and studying how to incorporate blockchain technology into their services. For example, Société Générale issued a security token in 2021 through Société Générale – Forge, a regulated subsidiary, with the underlying asset being a EUR 5 million Medium-Term Note on the Tezos blockchain.
3. Asset owners can create security tokens backed by specific assets, such as real estate or fine art. Investors can buy and sell these tokens on a blockchain, which provides increased transparency and liquidity. For example, Kasa Korea, a real estate securities trading platform that uses blockchain to make investing in real estate capital markets assets accessible, has completed funding for at least three commercial properties in Gangnam, Seoul.
4. Another type of issuer in the security token ecosystem are asset managers. These firms manage investment portfolios and can use security tokens to represent ownership in these portfolios. For example, in September 2022, Securitize, a digital asset securities firm, tokenized a fund interest in KKR’s Health Care Strategic Growth Fund II on the Avalanche public blockchain.
5. Corporate companies can issue security tokens to raise capital. The tokens may represent ownership in the company itself or be tied to specific assets or revenue streams. Many established companies and corporations have started to issue security tokens, particularly in the fixed-income sector. For example in 2022, DigiFT successfully listed a one-month corporate debt security token issued by Diners Club (Singapore), a credit card company. The note was fully subscribed at its initial offering, and investors could trade the security token through an Automatic Market Maker liquidity pool on DigiFT Security Token DEX.
Advantages of being an issuer
Apart from the aforementioned first-mover advantage that issuers can attain, entities can reap other benefits from issuing security tokens.
1. Greater Liquidity
Issuers are able to tokenise their illiquid assets. Assets such as real estate, art and private company interests often are cited as illiquid. Investors usually demand a higher premium to compensate for this liquidity risk and owners of such assets are unable to utilise the full value of their assets.
Tokenising assets reduces the liquidity risk significantly since the tokens created are more liquid. Once the underlying asset is tokenised, tokens can be easily traded on exchanges. As such, issuers can raise funds efficiently and economically.
2. Wider Investor Reach
In the past, selling a fraction or a part of an apartment or company share was not practical. Through tokenisation, issuers are also able to fractionise their assets. Many tokens can be created and backed by the same asset that the issuer pledge. A larger number of tokens, each representing part of the asset, allows for a far broader range of investors to participate and gain ownership of the asset.
3. Improved Transparency
Through tokenisation, ownership records and information regarding the underlying asset can be held in a digital ledger. The properties of digital ledger include immutability and real-time data, which offers greater transparency as well as ease of access. Issuers can retrieve token and transaction data efficiently for regulatory or compliance needs.
4. Lower Transaction Costs
STOs also involve fewer intermediaries than traditional IPOs which translates to cheaper fees (roughly 40% less than an IPO), resulting in lower barriers to entry. This means that small and medium businesses can also afford to fundraise through STOs.
Considerations for Issuers
1. Regulatory clarity
Countries such as Thailand, Singapore and Hong Kong have been proactive in providing guidance on security token regulations and licensing requirements for the STO industry (e.g. Capital Markets Service license for a security token issuance platform in Singapore). Although the technology and applications of blockchain are new, regulators have taken steps to understand such technologies and develop ways to protect investors. One example is the commencement of Singapore’s Project Guardian, a collaborative initiative with the financial industry that seeks to explore the economic potential and value-adding use cases of asset tokenisation.
2. Investor education
Traditional investors may not be immediately familiar with smart contracts or digital wallets. They would need to understand this new technology before embracing STOs investing. That said, adoption has been increasing. State Street reported that “all financial markets will have to digitize their processes and tokenize their assets to remain relevant.” There are also more stakeholders providing secure mechanisms to engage DeFi. For example, institutional-grade digital asset custodians play an important role for investors acquiring and holding security tokens or crypto assets.
3. Verifying source of capital
DEXes have faced increased scrutiny for falling short of regulatory requirements. The lack of KYC/AML compliance processes limits the ability to bridge RWAs with DeFi ecosystem. A regulated security token exchange can address this gap with client onboarding and transaction monitoring measures adopted from traditional finance. In addition, exchanges can implement on-chain AML checks using blockchain and crypto compliance solutions software such as Elliptic. The token issuance process requires a network of KYC/AML providers, legal firms, broker-dealers, and others as seen in our previous article on the STO ecosystem. All these methods of verifying the source of capital are almost a prerequisite for most institutions stepping into RWA tokenization. It assures issuers that their investors are legitimate.
Conclusion
In conclusion, issuers play a critical role in the security token ecosystem by creating and issuing security tokens that represent ownership in real-world assets. By tokenizing assets, issuers can reduce liquidity risk and improve efficiency while accessing a broader range of investors and lowering transaction costs. While regulatory clarity and investor education remain important considerations for potential issuers, the rise of blockchain technology offers new opportunities for issuers to access capital from the Web3.0 world. By leveraging decentralized security token exchanges like DigiFT, issuers can access an alternate source of capital in a regulatory-compliant manner. With the potential benefits of issuing security tokens and the advent of innovative new platforms, we expect continued growth and innovation in this dynamic and rapidly evolving ecosystem.
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 efficiently and cost-effectively. Investors can trade with continuous liquidity via an AMM mechanism and retain control over digital asset tokens in their own wallets. We are a global outfit backed by well-established venture partners. The founding team originates from international financial institutions and has deep blockchain technology knowledge.
For more information, please contact:
