Can Security Tokens Disrupt Traditional Finance?

Proponents of security tokens are predicting a bright future for the sector, but why is it so hyped?

The mainstream financial industry is starting to scratch the surface regarding the benefits of security tokens and the underlying blockchain technology. Banks, exchanges and payment companies are already developing test cases, working on new products and applying for patents all based on blockchain technology.

The nascent technology is being pushed further by the growing popularity of cryptocurrencies and tokens.

“Tokenization dramatically expands the ability to create new financial products,” according to a post by Luc Falempin, CEO of Tokeny, a blockchain company focused on simplifying token purchases and management for both issuers and end users. He added that the financial sector is about to be disrupted by a “force” bigger than many realize through securities tokens.

The growth in blockchain-based innovations is partly because of its revolutionary decentralized model that many industries find advantageous as it streamlines the business processes.

According to Falempin, there is a notable rise in securities tokens this year, which are perceived as a bridge between traditional finance and blockchain, offering equal benefits to both.

“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.”, he said.

Security tokens could dominate the cryptocurrency market

Many in the sector predict that securities tokens will dictate the digital currency market by 2025, which makes it easy to understand why some financial regulators are already working on critical infrastructure that will allow securities to be established as digital tokens.

Australia’s ASX is developing a “private blockchain” to tokenize securities for the domestic equity market. Coinbase, one of the largest digital cryptocurrency exchanges, is on its way to becoming the first federally regulated platforms for digital coins classified as securities after receiving the go ahead to acquire three licensed companies involved in security trading.

Circle Internet Financial Ltd., announced in June it plans to register as a brokerage and trading venue with the Securities and Exchange Commission (SEC) so it can assist investors to trade tokens that are classified as securities.

Why is everyone into security tokens?

Security tokens are essentially liquid, digital contracts for fractions of any asset or security that already has value and is subject to securities regulations. By denominating fractional ownership of an asset in tokens investors are guaranteed that their ownership stake is protected on the blockchain ledger because it is more structured.

Security tokens could provide access to investments for retail investors that do not have substantial capital. This could bring a lot of interest from the general public because it would not require a high amount of initial capital. Such security tokens could boost liquidity by tapping resources from the lower levels of the economic pyramid.