We have seen hypes coming and going within the blockchaincommunity and the word ‘security token’ seems to have been going around for a while. When does it make sense to digitise financial assets by using a security token? Max Kops, who launched his new book Assets on Blockchain along with his keynote at Malta A.I. & Blockchain Summit, shares his insights.
Security tokens have the purpose of digitising financial assets in a way that makes them liquid and easy to transfer. This happens by moving the assets that are nowadays managed by banks and include a lot of paperwork onto the blockchain. Once they are stored on the blockchain, many platforms, providers and wallets can integrate with each other.
Instead of moving the token from bank A to bank B and encountering fees that the banks need to charge for their operations, the blockchain serves as a decentralised management platform for those assets.
It is not the bank that performs the transfer, but the network. The banks just provide additional services like custody or user interfaces. As I discussed in the book, this will not completely replace the banking system – but it will drastically reduce its impact and force innovation.
Why do we need a new technology for financial assets?
The reason of shifting financial assets from the banking system onto the blockchain is simple: the intervention of centralised institutions is reduced, the clearing and settlement is cheaper and a lot of manual work can be automatised. It is however important to evaluate the use of a token. It makes sense in many cases, but there are cases in which other ways are the better solution and tokens would make the process much more complicated. Unlike many of the so-called advisers, my team performs due diligence and a proof-of-added-value test before any token is used. In my opinion, a token should only be used when certain business values can be generated and it offers possibilities in the long term.
Let’s focus on two use cases to consider for security tokenisation.
The first: startups and ESOPs. Raising money through an IPO is tricky as a young startup, the VC market lacks transparency and crowdfunding oftentimes is bound to high fees and an adverse selection of projects. Deploying a security token is much leaner than an IPO and allows for a faster time-to-market. The process of tokenising the shares and getting the legal setup done to being ready for the first private placements can be done in weeks. This is possible since tokens follow a standardised approach and certain legal frameworks allow a quick adoption of the rules. At the same time, there are far less stakeholders and processes involved, which makes it a lot faster.
The same goes for stock options given to early employees (ESOP) – they can be tokenised and save a lot of the paperwork that would otherwise be necessary.
The second: real estate. Nowadays, it is rarely possible to invest in a property with just $100. People usually save over decades until they can obtain a loan from the bank and finance a property. Instead of being limited to bad interest rates, people could invest with a little sum like $100 into real estate properties. They will get a security token in return that might serve as a profit share of the revenue made. The token can be easily transferred with a few clicks and once the regulation and the user interface is built real estate markets become liquid as they have never been before.
Assets on Blockchain is a standard book about disrupting finance with the help of blockchain. The book provides a compendium of security tokens and how security token offerings work. It guides startups as well as people from the financial industry through the process, considering financial, technical, regulatory and business aspects. You can get your own copy on assetsonblockchain.com.
Kops is an advisor who accelerates startups and token projects. He shares his knowledge globally at conferences like the Malta AIBC Summit and has written three best-selling books about the topic.