The world has slowly started realizing the benefits of tokens and is slowly adopting in its various walks of life. But one industry that is yet to get “tokenized” is that of investment and finance. Even though there have been some attempts to tokenize securities, the general acceptance will still take time to come in. But as the things are placed today, it looks like Security Tokens could hold the future for the world of Finance and Investments.
Security Tokens: Tokenizing Tradition Securities
A couple of years ago token and its benefits were completely unheard of. But as the markets begin to mature and the world started getting more aware of the positives of tokenization. A lot of stakeholders including regulators and investors begin their trials to define and develop a use case of tokens. The Swiss financial regulator FINMA was one of the first to put a definition these and divided them into 3 types based on their function and use case. This included
- Payment Tokens (like bitcoin)
- Utility Tokens (like Filecoin)
- Asset Tokens / Security Tokens (like tokens that represent a share in a company)
While other tokens did have their own ways of disrupting the industry, people started looking at security tokens a solution rather than a disruption. Security Tokens just like securities could be subjected to regulation and were not designed as a way to circumvent existing regulations. While being regulated, these tokens provided amazing benefits for investors as well as issuers. Some of the benefits included
No Middleman: One of the main advantages of a security token that was sighted was that of removal the middleman from investment transactions. Typically, to buy a security, an investor needs a middleman which could be a broker, a bank, or some type of financial institution. With a security token, however, a business could sell, say, a share of itself without the need for a middleman.
Lower Fees: With no middlemen, the fees associated to them also went off. Security tokens remove the need for most bankers and the smart contracts on which these tokens are based on also removes the need for lawyers.
Faster Trades: Middlemen apart from adding cost also add friction to the transaction. A security token sale means faster deal execution and completion. When fewer people are involved with a deal, it means faster deal speeds.
Free, International Market Exposure: Even with globalization at its peak, it’s difficult for a securities trader or an investor to directly invest in securities of some other country. Security tokens could play a vital role in making of a truly global, international securities market where businesses can market their investments and securities to anyone with an internet connection (assuming they comply to regulatory guidelines of those countries).
Less Manipulation from bigger institutions: Big financial institutions have huge command and say over the market. It has been noted a number of times that these financial institutions are often caught manipulating markets for their own gain at the price of small traders and investors. A security token marketplace will lead to less manipulation from financial institutions.
While security token definitely sounds a boon, they too have their share of disadvantages currently since they are not completely regulated. Regulators globally may have to join hand work towards making security tokens more mainstream so that its advantages could be reaped well by all stakeholders.