Introduction
What would you do if we told you that you could own part of a million-dollar painting or a house thousands of miles away? What sounds implausible is possible thanks to security Tokens and their ability to divide tangible assets. This article will guide you through the revolutionary tokenization of assets on blockchain and how it is transforming the world of investing.If you want to know more about security tokens and why they are changing the rules of the financial game, we recommend you continue reading this article.
What are security tokens
A security token, security token or tokenized security is a token, that is, a cryptographic asset, that represents a participation or a tangible asset in the real world. Security tokens are the tokenized version of a traditional security.
When we refer to traditional security we are talking about investment instruments framed within the Howey Test, which we will talk about later.
Although, right now this definition may sound somewhat vague, we will delve into it throughout the article so that it is as clear as possible.
Characteristics of security tokens
A security token is a Security issued and registered in a Blockchain, so its structure and operation resembles other types of cryptographic assets such as NFTs or utility tokens.
Asset tokenization, that value or right is represented digitally by being registered on a Blockchain. Whether the purchase, exchange, storage or any type of transaction carried out with this security is carried out under the rules of the network in which it is stored.
Security tokens can be securities, promissory notes, bonds, shares, pieces of art or some object that is considered by the issuing entity as a frictional representation. These tokens can be issued by both companies and governments.
Differences between security tokens and cryptocurrencies
Although both are digital assets registered on a Blockchain, securities represent shares or physical assets. Furthermore, they are subject to a real value determined by a global market and under the regulation of some financial instrument that controls, primarily, the non-digitized good.
Cryptocurrencies are also digital assets, but they are designed, as their name suggests, to function as a currency, that is, as a means of exchange and not as a future value bet, although they sometimes acquire that use. In turn, cryptocurrencies have their own decentralized regulation.
Blockchain and tokenization
Thanks to the Blockchain and its ability to allow a good, bond or similar to be converted into a digital asset, security tokens exist.
Tokenization of assets thanks to blockchain technology
Being able to tokenize and, therefore, fractionate a physical asset or a bond to divide it into several parts contributes to its acquisition and democratization, since if this possibility did not exist, obtaining it would be much more complex due to the value of the good or its intrinsic characteristics. .
Works, real estate and other assets can be tokenized, which can be divisible when digitized, whereas in the physical world it would not be possible. For example, a painting cannot be divided, but its value can be tokenized. With this, different people own an X amount of tokens that in its entirety represents the value of the work.
At the same time, as we have talked about in other articles, one of the great benefits of Blockchain technology is the automation of its processes, thereby eliminating intermediaries, reducing costs and time in the acquisition of security or in the distribution of dividends.
If you want to delve deeper into this vast Universe and discover all the advantages of this technology, we recommend that you enroll in the Blockchain Ecosystem Course . since in this topics like these are discussed in depth theoretically and also put into practice.
Types of tokenizable assets
All types of assets can be tokenized. We will focus on the most important ones, such as real estate and company shares, but any element that represents value can be digitized.
Actions
Shares are one of the securities par excellence, since they are one of the most commonly known and used forms of investment throughout the world. There are numerous companies, especially ICOs, that have used this method to obtain liquidity quickly and use those profits to make a greater investment in the company.
On the part of the acquirers, the great advantage has to do with the distribution of dividends, since being automated it is simpler, more direct and secure. At the same time, since the actions are registered in the Blockchain, they are more transparent than traditional Security.
It is important to clarify that not all security tokens can be divided unlimitedly, since some are linked to, for example, the right to vote and certain dividends.
Real estate
Physical objects can also be tokenized, in this case we will use real estate as an example, since they have little liquidity and are more difficult to buy and sell compared to other lower cost elements.
A house hardly has several buyers; by tokenizing this asset, its liquidity increases considerably, since users can acquire “a part” at a lower price, making their purchase more accessible.
On the part of the seller, it achieves greater and faster liquidity by allowing several users who pay smaller amounts to be part of the purchase.
An example of a company that is carrying out this type of practice is Hausera. A Spanish company that allows you to acquire a security token that represents a part of a property for a minimum value of €100.
Debts
To issue tokens for, as in this case, the purchase of a debt, these are distributed based on a Security Token Offering whose purpose is the financing, in a participatory manner, of a project that, as with shares, the automation of the process would help guarantee payment, since as we have seen on numerous occasions, many countries or companies are unable to pay their debts in the established time and under the established conditions.
In turn, the buying and selling processes would be facilitated by reducing waiting times in the acquisition and eliminating the costs of unnecessary intermediaries.
Regulation and compliance
One of the problems with the issuance of security tokens, as with classic assets, is their regulation. These depend on the jurisdiction in which they are located, so, in a decentralized, more democratic and broad system, defining a demarcation is complex.
At the same time, it is important to understand what we understand as value. To get closer to this conception we will use the definition that was adopted after the case of the Security Exchange Commission vs WJ Howey Co., which is the most used today.
Legal framework
In Spain, security tokens are considered financial instruments by article 2 of the Securities Market Law, in accordance with European regulatory requirements.
In the European Union, the MiCA (Markets in Crypto Assets) regulations, which have already been approved but will not come into force until 2024, will be in charge of regulating crypto assets, while in the US it is the Securities and Exchange Commission. SEC (Securities and Exchange Commission), the entity in charge of its control. Its legislation dates back to 1933 and frames security tokens within traditional security tokens.
To understand the importance of security tokens in these areas, we will first give a short summary of each one.
KYC is the process of data collection and verification to prevent illicit activities, while AML is the set of laws intended to prevent and identify these types of activities.
Thanks to the use of Blockchain technology, transactions are more transparent as they are recorded in the network itself. With this, both the data and the exchange are stored in an immutable and public manner, facilitating access, but also the transparency of the purchase and sale of security, making illicit activities difficult and favouring their tracking.
Howey test
To determine what a security is, you must follow a series of rules that were established in the trial of the Security Exchange Commission vs. WJ Howey Co. This trial took place in 1946 and laid the foundations for the definition of a security after The United States Court determined the three rules for an agreement between individuals to be considered an investment or security contract.
This concept is based on three rules, in principle, simple, but which, with the passing of the years and the modifications in payment methods, as well as the structural and organizational changes in entities and institutions, have caused its definition to be increasingly complex, surely forcing it to readjust.
One of the requirements to be considered a security is that it be an economic investment. In the year the definition was created, it was an investment of money, but this consideration has been expanding with the appearance of new forms of payment.
In turn, the investment must be in a common company, the most complex point of all, due to its lack of definition and which continues to give rise to ambiguity, since it is a term still without a clear and concise explanation.
Finally, there must be an expectation of obtaining a return for both the promoters and the investor through that investment.