Security tokens are the result of a great symbiosis between the crypto industry and traditional finance. The same might be true for stablecoins, but security tokens take a step further by transforming the way we trade all forms of securities, including company shares, real estate, bonds, and commodities. They merge the stability of the underlying assets with the features of blockchain.
Thanks to security tokens, non-liquid assets, such as real estate and certain commodities, become easier to trade, opening the door to a broader range of investors.
According to security token data and intelligence platform Security Token Market, the total market cap of the 170+ tracked digital securities exceeds $15 billion as of today. Although this is only a drop in the ocean of the global equity market, valued at over $120 trillion, security tokens have the potential to improve the interaction between all players participating in the equity market, with the extent of its contribution challenging that of the internet itself.
Investors who plan to get exposure to traditional assets while leveraging the benefits of blockchain should know about the three main types of security tokens:
Equity tokens provide holders with the ownership rights of an asset, most often company shares. The key difference between equity tokens and traditional stocks has to do with the way the ownership is recorded. Traditional shares represent paper certificates while equity tokens are recorded on a blockchain, in which network participants collectively monitor transactions without the help of intermediaries and authorities. Other than that, equity tokens are recognized by financial watchdogs as securities from a legal perspective.
Thanks to equity tokens, startups and private companies can raise capital without spending that much for an Initial Public Offering (IPO) and having to consider multiple financial report obligations.
Companies looking to raise money by issuing security tokens can hold a security token offering (STO), which is an IPO-like fundraising mechanism that is accessible to a wider range of investors and is more convenient. This might be the perfect scenario for startups, which may benefit from a more democratized fundraising model.
Asset-backed tokens provide holders with ownership rights of real-world assets, such as real estate, commodities, and art.
The benefits of these tokens are even more evident compared to equities, as most of the real-world assets are less liquid or non-liquid.
For example, converting an expensive property into cash may require time and effort in order to find a buyer willing to pay the fair price. With security tokens’ fractional ownership feature, the real estate asset can be divided into multiple fungible tokens that enable it to be sold to multiple investors, who end up with partial ownership in it. These tokens could enable investors to get exposure to the real estate market in the best regions.
Besides providing better liquidity and ensuring a higher degree of security, asset-backed tokens bring transparency, simplify the trading process when more parties are involved, and increase the quality of interactions between all players, which includes regulators.
Asset-backed tokens can make the real estate and commodity markets more accessible to retail investors. While the latter may invest in commodity derivatives, such as futures and options, security tokens provide them with ownership rights.
A good example of an asset-backed token is the United States Property Coin (USPC), which enables holders to become part-owners of an income-producing property portfolio, with the seed assets being a $10 million luxury multifamily property in Venice Beach, California.
Some commodity-backed tokens can fall into the category of stablecoins and may be used as virtual currencies.
Debt security tokens provide holders with a fixed income over a predetermined period. Debt tokens may represent any debt-based instruments, including corporate bonds, real estate mortgages, or debt cash that works similarly to short-term loans.
With debt tokens, the contract for such a loan is recorded on the blockchain network, ensuring that the debt instrument is secure. The price of the debt depends on the dividend model and the risk related to the loan.
Many bonds are regarded as safer investment instruments thanks to a guaranteed regular fixed income, although this depends on the issuer.
As you can see, the different types of security tokens reflect nothing else than the different types of securities. When it comes to the blockchain solution used, we can differentiate security tokens by their blockchain or smart contract standard. For example, there are security tokens based on Ethereum, Algorand, Solana, and other Layer-1 protocols.
While still at a nascent stage, security tokens are poised to transform the way we trade securities by addressing inefficiencies, bringing more liquidity, and offering more opportunities to a larger group of investors worldwide.