What Is A Security Token & Security Token Offering (STO)? Types & Benefits of Security Tokens

Security token is the solution to all problems for buying and selling digital assets. With a security token one can have the ownership of a real-life asset like real estate, property, stake in a company and possible stake of anything somebody owns. Companies organize events named ‘security token offering’ to let investors invest in their product by distributing them security tokens. These security tokens then act as a proof of ownership of the entity for which the tokens were issued. Security tokens are reliable because they are regulated by state and judiciary laws.

What are security tokens?

In the context of business and finance, a security token is a digital asset whose purpose is to serve as a proof of ownership of an underlying asset. At its core, the security token is a very long set of characters consisting of numbers generated by a computer.

Using a process named tokenization, one can issue the security tokens which can represent even fractional ownership of an asset. Having the security token of an asset can give one benefits including but is not limited to equity in a company or product, right for voting, earn dividend from profit, etc

Characteristics of a security token

Transferable and tradeable:

Security tokens can be transferred using the blockchain technology. By transferring the security token one can transfer their ownership of an entity to another person. This helps to reduce the hassles of paperworks and other legal procedures which take days to finish. All someone needs to do is to create a token of the asset and upload it on the blockchain network.

Underlying asset:

Every security token has some sort of underlying asset which it is tied to. The underlying asset can be as silly as a toy to as important as the stake in a company.

Ownership:

Owning the security token gives one the control over the entity it is linked to. For example, if the security token is created to represent a stake in a firm, the owner can get the share of the profit that the firm generates. It also gives the owner other associated rights, in our case earring dividends, cast votes.

Regulation:

Security tokens need to comply with the laws and regulations of the state and need to verify that the investor or buyer of the token receives their share of the entity. In the United States, there have been attempts by different companies and groups to impose proper regulations on security tokens and there are active SEC regulations on them.

What is STO?

STO is an abbreviation for “Security Token Offering”; it is a process of fundraising that companies organise in return of offering the investors security tokens. The methodology in Security Token Offering is quite similar to Initial Public Offerings in the stock market; both are to raise funds from the investors by offering them a stake in the company.

STO (Security Token Offering) can also be compared to Initial Coin Offering, however, the former is regulated and backed by underlying assets.

Here are the topic characteristics of a Security Token Offering -

Regulated: Every Security Token offered in the “Security Token Offering” must have to comply with SEC regulations. For example: even before STOs are opened to investors to apply for, the issuing companies have to fill up the S1 form. They also collect documents like KYC and AML from investors.

Ownership: Just like IPOs, in STOs investors get the proper ownership of the underlying asset. But what’s great about STOs is that investors can easily liquify their token and sell it to other people. Additionally, as STOs typically offer fractional ownership, somebody without high net worth can also think of investing in them.

Utility tokens:

Utility token is a concept closely linked with the idea of security tokens. The similarity between a security token and an utility token is that both of them are digital assets that leverage the technology of blockchain. But, while the former gives you the complete ownership of an entity, the latter only gives access. Utility coins are offered through Initial Coin Offering (ICO)

Gives access: The goal of an utility token is to give investors the access to a certain entity, for example the right to use a service or a product.

Regulations: Unlike security tokens, utility tokens do not come with any kinds of security regulations, the reason being: they are not any security.

Types of Security Tokens

There are three main types of security tokens:

Debt Tokens: These tokens represent liabilities, like a financial obligation or corporate bonds. From an investment perspective, it means that debt tokens mean that an investor provides capital to a specific company or project with an expectation of returns in the form of interest or dividends. They are mostly incorporated in real estate leases or temporary financing agreements. The value of these tokens depends on the risk and returns on the asset at the back of it. One of the important benefits of debt tokens is that they introduce fractional investment.

Equity Tokens: The equity tokens make investors to invest in a company for instance investing in stocks. However, instead of issuing paper certificates of ownership, it provides for ownership via the block chain. This helps make equity tokens more secure as well as easier to trade. Businesses opt to finance using equity tokens because investors do not want voting rights since they can sell non-voting shares. These tokens are projected to gain more demand when businessmen seek new ways of funding their projects or business ventures.

Asset Tokens: Secured digital currencies are anchored on physical properties such as land, precious metals or even inventory. These tokens make the possibilities of Fractional ownership, where investors are able to buy portions of rare and expensive assets possible. Asset tokens enhance flexibility and certainty as means of participating in the sale of complex assets such as real estate or metals.

Benefits of Security Tokens

Increased Liquidity

Another advantage which belongs to security tokens is the increase in the volume of trading options. For instance, investments such as real estate or private equity are normally categorised in traditional markets as illiquid investments, a notion which implies that they are not easy to purchase or sell. Security tokens help solve this problem by affording fractional ownership of these assets and thus it is possible to buy partial ownership of valuable assets.

This fractional ownership introduces new investors into a deal by allowing these tokens to be traded on compliant, regulated markets. In addition, by using the blockchain technology, security tokens can get a global pool of buyers and sellers enabling investors to sell such tokens where markets are illiquid.

Lower Costs

The last major benefit of security tokens is the possibility of decreasing the cost of transactions. Financial operations are typically conducted using an array of brokers, custodians as well as several clearing houses, with each charging a fee. Security tokens cut out most of them through the incorporation of the concepts of blockchain technology.

Due to the fact that security tokens can be traded on a one on one basis, the role of middlemen is trimmed and as a result, costs are cut. This means that transaction costs are lowered thereby encouraging investment which was probably out of reach for some investors due to high fees in conventional markets.

Automation and Efficiency

Smart contracts also present security tokens as highly automated and operationally efficient. Smart contracts refer to contracts that operate on their own, where the conditions of a particular transaction are implemented as soon as specific conditions of the contract are met. These are written contracts that are recorded on a blockchain, and are therefore equally protected against vandalism.

It follows that smart contracts make the execution of tasks such as dividends, transfer of ownership, and compliance with laws much easier to handle. This in a way eliminates the need for paperwork and minimal supervision and oversight saving time, minimising errors and hence improving the efficiency of investments. For example, it is possible to automate the process of payment of dividends while calling for which used to be very time-consuming and complicated to the investor.

Global Access

Security tokens can also be a powerful tool to open new opportunities for investing and eliminate geographical restrictions by cutting the threshold level. Other markets such as the traditional investment markets are constrained basically by geographical factors and market regulations, hence may hinder some investors from getting access to them, especially those from other countries. Security tokens, on the other hand, can be bought and sold from anywhere in the world based on some legal aspects.

Such access means that the opportunities for investment expansion will be made available not only to international organisations and investors but also to the general public. Individual and institutional investors from different geographical areas can now get to the markets that were once reserved for institutional investors or from certain countries. This democratisation of investment is especially advantageous when choosing stocks for opening new points of diversification of own securities by classes of financial instruments and regions.

Transparency and Security

Transparency and security are two important aspects when it comes to investment in any business, and that is where blockchain technology is unbeatable. Every transfer of security tokens is stored on the block chain which makes it easier to verify ownership and transfer history. This eliminates possible fraud or manipulation by any party as well as provides equal and accurate data to all stakeholders.

Furthermore, in the blockchain system, there is no question of hacking or penetration of data by notorious hackers. After the ownership is registered in the blockchain, it cannot be edited or deleted, thus making investments safer for investors.

Conclusão

We hope this article on security tokens and related concepts has been able to plant the core concept regarding security token and STO in your mind. To sum up, security tokens can be used as a digital representation to represent the ownership of a real-life entity or asset.

With blockchain technology, a person or an organisation can create or collect security tokens to give away or own an asset. By using “Ramp”, you can buy or sell 50+ assets across the world. Global payments can be a cause of problems, but with “payouts”, you can easily pay people anywhere with just a single click. What if instead of paying, you want to collect payment from around the world? - Our “collection” is the solution to collect global payments in real-time.