What did I learn and share about Security Tokens at The Blockchain EXPO North America 2018 in the Silicon Valley?
What did I learn and share about Security Tokens at The Blockchain EXPO North America in the Silicon Valley?
After 1 year since my visit to the same conference (in the midst of the 2017 ICO craze) I returned to this great event in a much more bear market environment, with much less so-called crypto-billionaires and many more savvy investors that believe in the future of the Blockchain technology and its potential to change not only Financial services but the world as we know it.
I was honored with the position of chair of the Blockchain Platforms and Strategies stage at The Blockchain EXPO North America in the Silicon Valley. And as most of my research at UCLA revolves around Security Tokens this was the topic of most of my conversations as well as my opening presentation on Day 1.
So what is a Security Token?
Security tokens are defined as investment contract and or value representations based on the Blockchain that can be regulated by security laws.
According to Investopedia.com:
“A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.”
This definition encompasses those tokens that signify basic assets such as real estate, derivatives, debt, equity and etc. as well as those utility tokens or ICOs that were released in 2015–2018 that are now considered securities by the SEC.
So why do we need security token if we already have a robust and working equity and bonds global market?
One distinct aspect of security tokens involves its ability to be self-executing through smart contracts. This technology allows for the many different elements of traditional equity, derivatives or bonds trading contracts to be programmed into the code and smart contract of a security token.
Once securities, bonds, derivatives, royalties, and many other financial contracts become tokens, automation feature of smart contracts (integrated into token’s code) will self-execute the clauses of the contract (including payments) and significantly reduce costs and timeframes of compliance and settlement requirements.
Then the trade of tokens such as representations of shares of startups once regulated will be free from restriction allowing the trade of security tokens to spread like wildfire! In an ideal scenario security tokens (digital investment contracts) will be traded freely among the 4.1 Billion global Internet users, and the extremely complex trading across different international jurisdictions will be a thing of the past.
After many conversations in the hallways of this massive conference, I decided to synthesize the 3 key benefits of security tokens. Please find them below:
3 MAIN BENEFITS OF SECURITY TOKENS:
1) COSTS BENEFITS OF FASTER AND AUTOMATED SETTLEMENT & COMPLIANCE REQUIREMENTS
Cost reduction and efficiency are some of the most immediate benefits that security token technology brings to the market. The theory is that traditional systems based on paper and those developed with old technology such as email, file transfers, and photocopies make financial administration much slower and inefficient. Thus, the savings that an automated system of compliance and settlement based on security token technology can be over $6 billion USD, according to a Goldman Sachs report.
Moreover, settlement timeframe of trading is expected to be significantly shorter. In traditional markets, settlement can take up to 2 days or more, but in a security token environment, this settlement can decrease to 1 day with the potential for an immediate settlement in the very near future.
2) 24-HOUR MARKETS WITHOUT BOARDERS & EXPANSION OF AVAILABLE ASSET CLASSES.
Security tokens could solve the problem of a divided market, facilitating the trade of assets from country to country. In a security token environment investors in Dubai could easy trade in and out of fractional ownership of property or businesses in Sao Paulo and vice-versa.
When the global market becomes fluid, ownership claims are more feasible, and assets like corporate bonds, residential properties, and T-bills, can be traded on a level playing field. Furthermore, 24/7 markets would significantly increase not only the volume of overall trades but also the liquidity potential of various different assets.
3) GREATER LIQUIDITY (SECONDARY MARKETS)
The ability to quickly liquidate security tokens is crucial for the market to flourish. Traditionally, individual investors stuck in certain deals (e.g. real estate deals) can’t get out of them without losing money. However, greater liquidity will occur as a result of trading across borders and 24/7 markets.
Today the majority of private assets have comparatively low liquidity, making it too costly to trade them. However, in a security token world LP positions in VC funds could easily be liquidated without unnecessary discounts, and small & mid-size firms could gain easier access to capital.
In conclusion, after a great event I would like to leave you with 2 pieces of advice:
1. When issuing a digital token, you can avoid several reporting obligations by implementing appropriate protocols to control the number of security token holders and when and to whom they trade. As it is widely known in the industry security tokens are still assets only available for accreditor investors that have been KYC/AML approved.
2. As you may think about raising funds across the globe via an STO- security token offering, make sure to hire a lawyer to help with compliance across many international jurisdictions. This is significantly complex, and it is money well spent.
I hope you enjoy this post and if you can come to London and have a coffee with me at the next Blockchain Expo –Global 2019 on April 25–26, 2019 where I will be speaking about security tokens.
PS -I am not a lawyer, this is not legal advice, these are just my opinions.