What are Security Tokens and STOs?
For the uninitiated, Security Tokens have been receiving a lot of attention in 2018. They are being hailed as the ‘next big thing’ and the future of decentralised technologies. However, what exactly are Security Tokens? To answer this question, we must first take a step back, break down the terms, and understand them individually.
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Token
A token can be anything in a given ecosystem. It can have one or many roles, multiple features, and purposes. A token is a representation of something in a particular ecosystem. It could be a value, a stake, voting rights and anything else that there is a consensus of. However, tokens are different from cryptocurrencies.
A cryptocurrency coin can be utilized outside of an ecosystem. Most cryptocurrencies are in fact used outside of their native environment. Whereas, tokens exist only on a particular platform. A token represents an asset or utility that a company has and is given to away to the investors during an ICO.
Security
An investment is considered a security if it is covered under the Securities Act and Securities Exchange Act. If an investment is marked as a security then it is subject to certain registration requirements. A company or an enterprise that is offering securities must register them. In this process, they are also required to disclose other information such as:
A description of owned properties and business purpose
A description of the security offered
Information regarding the company’s management
Financial statements about the company which are certified by independent accountants
The Howey Test
There are certain tests that are used to determine if an investment is a security. The Howey Test is one such test. It is used to determine if an investment can be considered a security or not. It defines an investment as a security if:
It is an investment of money
There is an expectation of profits from the investment
The investment is in a common enterprise
Any profit comes from the efforts of a promoter or a third party
Security Tokens
A crypto token that passes the Howey Test is deemed a security token. They are inherently subject to regulations and laws that other securities are. However, these regulations ground security tokens and put them in a unique position to bridge the gap between legacy finance and the blockchain world. In the blockchain world, ICO space is currently filled with uncertainty and fears of fraud, which are not unfounded. There is a lack of regulation for tokens, which breeds unaccountability. This makes investors and stakeholders hesitant. However, security tokens can heal this unease and amalgamate the crypto world and the legacy finance space together.
There are many other benefits of security tokens beyond their ability to act as a hybrid. They can improve traditional finance by removing the middlemen such as bankers and investment management institutions. They enlarge the potential pool of investors by enabling global reach. However, as with anything else take security tokens with a grain of salt. Removal of middlemen puts a lot of the responsibility back on the creators and traders. The argument against security tokens is that creators will not be able to take on this responsibility. However, the potential they have brought to the blockchain world is undeniable and they seem destined to play a pivotal role in the future of the decentralised space.
Security Tokens are another great use case for blockchain technology and one of many types of digital assets that will be growing in popularity. To learn more and discuss different types of digital asset, join our Telegram Group here — https://bit.ly/2DL0rL4