Brief description of security tokens
Security tokens are a fresh topic in the blockchain communities, as they enable traders and investors alike to change the way they invest in various areas of the market. Considering its current volatility and the growing distrust that scammers created during the last period, developing a security token seems the most appropriate approach for startups in the crypto market.
Basically, security tokens are tradable financial assets (such as stocks or shares) recorded on a distributed ledger or blockchain. The process of creating them, called tokenization, means issuing digital tokens that present the shares of a financial instrument on a blockchain. Therefore, security tokens acquire their value from external, tradable financial assets (known as securities).
As the crypto market is still evolving, security tokens need to be better described. Frequently, most of the issuers use the term “security token” but do not specify whether it is a debt, equity or any form of securitized investment, and what the investor’s rights and obligations are from a legal point of view.
A token is a digital presentation of a financial instrument
The distributed ledger features (transparency, shareholders’ registry maintenance, audit recording, interoperability between software systems, global reach) offer the potential to make securities easier to trade, driving equal access and better price transparency for investing. Yet, the tokenization won’t change the final act of an investment (whether it will be profitable or not).
Securities and security token regulations
Regulations on the market are needed in order to ensure that investors are protected by being given correct and relevant data, thus allowing them to make proper decisions. Mostly, they focus on guaranteeing that all investors are treated in the same manner and allowing the collection of taxes. The general rule is that the more accessible the asset is to the public, more regulations will it require to comply with. However, complying to regulations often only means that the companies are to fill in a large number of legal documents.
The regulatory system is in place not only for the investors/traders. Regulators are also overseeing the market to make sure that banks are capable to overcome difficult situations.
We all know the crypto market represents the future. Security tokens ensure that startups that are using crowdfunding to support their activities will no longer be outside of the law.