Security and asset-back tokens seem to be one of the highlights of the emerging cryptocurrency landscape. Such is the industry's popularity that some experts predict that security tokens could become a multi-million dollar market within the next decade.
With regulatory bodies that fall dramatically over the first coin offerings (ICOs), security token (STO) offers represent a worthy alternative. Companies like Coinbase and Nasdaq are raiding the STO arena. Here are five reasons why STOs are an exciting proposition.
Unlike utility tokens that are intended to only represent future access to the product or service of an issuing company, securities tokens represent the underlying interest in an equity / debt position, profit sharing, dividends, voting rights and other benefits that their holders may have.
Securities tokens represent a legal right to the ownership of the intrinsic value of the issuing company. They deliver significantly more value to the holder, potentially reducing the risk. In particular, there are numerous ways to calculate the intrinsic value of a security. The discount model on dividends, the method of residual income, discounted cash flow and others are all widely accepted methods. In other words, a token has an intrinsic value, that is to say that something is already worth today, based on the value it attaches to the holder, vis-à-vis the issuer, regardless of the potential future value attributable to that token.
In addition, securities tokens are intended as investments because they provide more basic structure, rights, corporate governance, processes, code of conduct, etc. The recently completed STOs include tZERO: a rather straightforward security token for an investment project in an alternative trading system that pays 10% of the company's profit to the token holders.
tZERO refers to the STO sale of higher receipts, raising $ 134 million. The project is a subsidiary of Overstock.com.
STOs allow investors of a company to obtain information on the issuer on a fully diluted basis – with full visibility on all tokens that have been given, promised or otherwise burdened.
The objectives of an adequately governed securities market have three criteria:
- Healthy capital formation;
- Isolate investors from their incorrect behavior by protecting them from external fraudulent activities;
- Enroll adequate compliance checks to maintain fairness and order in speculative markets.
The designed STOs provide a completely diluted but immutable transparency framework, allowing the above mentioned objectives to be achieved. This should provide a powerful point of consideration for anyone considering the attempt to get a point of view on the current situation, as it is directly in line with the regulators' agendas.
STOs that comply with regulatory requirements are certainly more attractive to sophisticated investors due to increased efficiency, clearer thresholds for transparency and a higher level of compensation for the parties involved in the transaction.
ICOs have undoubtedly dominated the cryptocurrency narrative in 2017. However, regulatory bodies such as the US Securities and Exchange Commission (SEC) consider many ICO tokens as titles. This classification highlights a large number of reporting and compliance issues that these companies are unable to meet.
There have been numerous legal actions taken by the SEC against ICOs considered as titles. For STOs, there are no such problems since companies from the very beginning list their tokens as titles.
By reaching in advance compliance with local and international regulations, both startups and traditional companies can exploit the benefits of an ecosystem of tokenized securities. This early compliance benefit offers companies an important advantage over other late-arriving competitors.
Security tokens have a recovery feature
Almost all cryptocurrency enthusiasts are aware of the dangers of losing access to portfolios that hold virtual assets. The absence of fund recovery functionality is one of the fundamental obstacles of virtual resources in the investment arena.
Properly constructed STOs provide the ability to re-issue tokens to shareholders. However, the jurisprudence for the execution of benefits such as these is, of course, subject to appropriate checks and balances and confirmations.
This provision is another example of how the STO model allows regulatory compliance. STO platforms like Token IQ can rely on investor confidence from the very core of the coded language that manages them, making it an infallible system for transferring ownership.
Emphasis on KYC / AML
Based on the design, the STOs emphasize the knowledge of customer (KYC) and anti-money laundering (AML) protocols. With the reporting and compliance burden that is part of securities trading, STOs require a solid audit trail.
While it is relatively simple to respect the AML in traditional trading environments where the funds are already in the global banking system, it is challenging on a distributed ledger in which the addresses of the portfolios are anonymous. The AML score with security token gives companies the ability to track transactions and ensure that they comply with regulations. It also allows them to make calculated business decisions related to an adjustable threshold for the approval of investor commitment.
To this end, platforms such as Token IQ create a framework that prevents the transfer of STO tokens to unsuitable recipients. This usually works by creating a series of protocols that determine if the recipient has already satisfied the required KYC / AML provisions.
This creates a much higher success rate than the forces of order, thus reducing the risk to the issuer. The use of an appropriate STO architect KYC token guarantees maximum security not only during the initial offer period, but also after the offer when the tokens have become freely negotiable.
In all, STOs provide the necessary regulatory compliance that can create a lively virtual asset trading scenario. Companies like Bithumb and Nasdaq are already taking steps to launch security token trading platforms.
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