This is our fourth article in our asset tokenization mini-series where we discuss how security token offerings can disrupt the financial world and what other greater implications they carry.
If you would like to read about our breakdown of the process behind a security token offering, click here; if you are interested in our take on security tokens and would like to learn about the basics – click here, and if you want to read about the principles which stand behind asset tokenization, click here.
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Security token offerings, or STOs, are a relatively new thing in the world of finance, however, they have become a hot topic recently, especially when new, highly-regulated platforms which allow fast and hassle-free asset tokenization were introduced. As we already discussed security tokens in one of our previous articles, we will just repeat here the definition we established previously on what security tokens are.
Security tokens are issued through an STO, a highly regulated asset tokenization process. Of course, a very similar process already exists, and it is known as IPO – where an enterprise can offer shares to investors through a stock exchange or a similar body. However, this traditional approach has several downfalls which STOs and supporting platforms can provide an answer to and ultimately change the world of finance.
First of all, security token offerings are more approachable to a larger number of people compared to traditional security trading bodies, due to the fact that the fees are lower both for purchasing and for issuing security tokens, and there is an option for them to be international. This is a large opportunity for small enterprises since going public through an already established IPO process would bear huge costs and would be limited to a specific country; this way, the fees are reduced to a minimum, and international investors with smaller capitals could also acquire security tokens.
Due to the fact that STOs use both blockchain and smart contracts as their primary vehicle, the markets can, therefore, be open at all times, and trades can occur at any point throughout the day. This is also a novel possibility that reduces sudden price surges and soars, as is the case with traditional stock markets. The STO markets could also be open through the weekends as well, giving the traders extra time to follow the markets and set up trades whenever they see fit, independent of the working hours and different time zones.
The great thing about the blockchain technology is that it can be immutable, such as Bitcoin’s blockchain. If we take this very important characteristic and implement it to govern everything related to security tokens, we get a decentralized, trustless system that doesn’t require any third-party interventions, maintenance and intermediation since security owners can do most of the work themselves – start a transaction, complete a transaction, transfer tokens from one wallet to another, and the blockchain ecosystem can be set so that it checks certain criteria and doesn’t allow fraudulent behavior.
As we discussed in our previous articles, STOs allow for asset ownership to be fractalized, which wasn’t possible until now when the technology to realize this idea has become available. This possibility to fractalize various assets can help make those same assets more liquid, making investing in real estate for example much easier, and bears smaller investing costs, which ultimately opens the doors to small-scale investing and offering an asset to be owned between the members of a community, for example.
Since STOs do not rely on teams of people to keep their maintenance in order but are governed by code instead, therefore it is highly likely a large part of the underlying processes will be automated. Automation, in turn, leads to lower system maintenance costs, as fewer ‘chunks’ are set aside for transactions, issuance fees, salaries, and other costs. Also, automation reduces the importance of middlemen in these transactions – what is done in traditional finance systems by hand is going to be done by code, and no accountants need to manually update the system.
Since almost anything within the security tokens can be programmed, compliance criteria can also be inserted within the tokens, and thus reducing the stress of the governing bodies to search for, stop and void non-compliant security trades.
Slowly, but surely, we are approaching the times when every transaction involving tokenized securities will be done so efficiently, and this efficiency will be present on a large scale, that many of the current systems that are now supporting the trading and ownership of securities will most likely become obsolete. As there are now various ways how one individual can create their own tokenized security and offer it to the world, it is just a matter of time when we will see the traditional financial systems merge with these new ones. But one thing is for sure – we are looking at a revolution in finance.
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