Leading Crypto Exchanges Warm Up to Security Tokens
Tokenizing real-world assets with full regulatory compliance is gaining more and more attention in the world of cryptocurrencies.
Crypto asset exchange operators are seeking ways to offer security tokens, a new form of digital assets that may change the cryptoworld. Not just leading crypto exchanges such as Binance and OKEx, but also stock market operators such as NASDAQ, have expressed readiness to start trading a new class of tokens that represent real-world value.
As a sign of the trend accelerating, the CEO and founder of Binance, Changpeng Zhao, tweeted in support of tokenization:
In the highly unregulated world of digital assets, it is somewhat confusing to conflate tokens and securities. Many initial coin offering (ICO) white papers include a disclaimer that the token on offer is not a security. Disputes whether a token served as a security or not have affected multiple projects, including Ethereum (ETH) and Ripple’s XRP.
Security tokens no longer feared
However, a new batch of token issuers want to present their tokens as something beyond a digital gimmick. The first attempt came from tokens backed by assets such as precious metals, as well as technological metals. But tokens could represent any traditional security, such as company stock, bonds, or other valuable assets.
For a working definition of security tokens, Cryptovest contacted Slava Rubin, co-founder of international crowdfunding website IndieGoGo. She believes security tokens have a key difference from the usual ERC-20 digital asset:
“Security tokens, unlike utility tokens commonly associated with ICOs, are actual regulated securities that are created and managed on a distributed ledger. These tokens are by nature designed to represent investment interests, such as equities, debts or dividend shares,” said Rubin.
She believes security tokens are an opportunity, and the hurdles are relatively minor, as issuing securities has a well-established tradition with clear regulations:
“Unlike utility tokens or other cryptocurrencies like Bitcoin, security tokens have a layer of regulation baked into their tokenization. This is designed to regulate how they can be stored, managed or traded. These rules were created to protect investors, so we don't consider them hurdles but instead regulations designed to ensure a fair market.”
Tokenization is one of the clearest use cases for the blockchain. The chief effect of tokenization is the possibility to democratize asset trading, since holding and transferring tokens is fast and easy. All it takes is a custodian to hold the actual security, and then distribute tokens that give rights of ownership of the underlying asset.
Trevor Koverko, CEO of Polymath, an Ethereum based project that aims to bridge the gap between blockchain assets and traditional investments, shared his vision of creating a marketplace for tokenized securities:
“All we are proposing at Polymath is that a financial security can be represented as a token on a blockchain, rather than a piece of paper. Blockchain-based securities are programmable, so you can automate much of the back-office functions like voting and dividends, and they are much more transparent than their legacy, paper counterparts.”
Koverko believes tokenization is a great fit for real estate ownership, as well as a source of liquidity for smaller or private companies.
In theory, tokens offer a degree of security and even the potential for centralized custody. While crypto projects often boast of being fully decentralized, in some cases, the token issuer can intervene to roll back rogue transactions or faulty smart contract outputs.
Tokenization may be slow to arrive, and so far, there are only a handful of early attempts, while “future utility” tokens are the chief digital asset available. But tokenizing assets and a democratized access to trading may become one of the largest trends in blockchain usage.