STOs have emerged as a prominent tool in the financial landscape, particularly in the field of blockchain-based projects. It is a method of fundraising that involves the issuance and sale of security tokens, which represent ownership or investment interests in a tangible asset or a company. It is the same as equities in traditional financial markets but uses blockchain technology to issue, clear and settle and custody of all the transactions. It does not require the use of intermediaries like stock brokers or even banks and it attracts liquidity to the trades from all over the world as it uses the Internet protocols to make the trades available in an open decentralised finance protocol.
DIGITAL REPRESENTATION OF ASSETS
Security tokens transform tangible and intangible assets into traceable and transferable digital assets on the blockchain. This tokenisation offers a set of benefits:
- Fractionalisation − It allows assets to be divided into smaller units, democratising access to investments that were previously only available to large capital holders. For example, tokenising an apartment building allows investors to purchase tokens representing fractional ownership of the building.
- Increased liquidity − One of the most significant advantages of STOs is the increased liquidity they offer. Traditional investment options, such as real estate or private equity, often suffer from a lack of liquidity, making it difficult for investors to exit their positions quickly. In contrast, security tokens can be traded on secondary markets, facilitating buying and selling of investments and increasing market liquidity.
- Enhanced transparency − Information about token ownership, associated rights, and asset management is recorded immutably on the blockchain. This increases transparency for investors, allowing them to verify the authenticity of tokens and the security of their investment.
- Efficient asset management − Automation of processes associated with asset management and corporate actions, such as dividend payments or profit distribution, reduces costs and time for companies and investors.
- Efficient capital raising − Companies can issue security tokens in exchange for funds from investors quickly, securely, and transparently, without the need for traditional intermediaries.
- Access to a global market − STOs allow companies to access a global market of investors, not just those in their home country, expanding funding possibilities and diversifying their investor base.
- Cost reduction − Process automation and the elimination of traditional intermediaries significantly reduce costs associated with raising capital.
- Increased protection − STOs are subject to the same regulations as traditional investments, providing investors with greater protection against fraud and abusive practices.
- Portfolio diversification − Security tokens can help investors diversify their investment portfolios, reducing overall risk.
What are security tokens?
Security tokens are digital assets whose value is linked to an external asset and are regulated by securities laws. Compliance with these regulations is crucial to ensure legality and investor protection. Unlike utility tokens, which grant access to services, security tokens represent ownership interests in assets such as physical income streams, companies, or dividend rights.
Operating on decentralised networks, security tokens leverage blockchain technology. Smart contracts, encoded with predefined rules, facilitate issuance, management, and enforcement. These contracts automate processes such as dividend payments and voting rights, ensuring seamless regulatory compliance.