Moving in a New Direction – Advantages of tokenization
Updated: Jul 27, 2020
By Fernando Ortiz, Diana Castro and Manuel Mojica
In October 2008, an anonymous visionary known as Satoshi Nakamoto published a white paper named Bitcoin, a way to build an electronic payment mechanism by combining a variety of main components. Turns out to be the fastest-growing digital technology in modern history. Blockchain is renowned for being an impenetrable encryption scheme, which may account for the resonance of this exponential development.
In the early days of the industry, the Initial Coins Offerings (ICOs) emerged as the predominant funding tool known as Cryptocurrencies, much of which was adopted by start-ups, entrepreneurs or businesses wishing to sell goods and services, usually linked to payment systems and blockchain space related projects.
With this instrument, an entrepreneur can raise millions for his company, such as the case of Ethereum's ICO, which was one of the early pioneers back in 2014, beginning at a price of just USD 0.31 per token and raising almost USD 18 million in just 42 days.
Nonetheless, ICOs allow entrepreneurs to raise funds without a real product or even a company, just a white paper that often has only a few pages, leading to bad deals for investors. That is why the industry has developed new methods, such as Security Token Offerings (STOs), that leave ICOs as their predecessors. The new strategy has a range of benefits over the ICO funding model, but it still maintains many of the attributes of the initial coin offerings.
From an investor's point of view, the STO has advantages over the ICO. The latter are more unpredictable, and some of them have been used fraudulently during their economic boom due to their lack of control. The cryptocurrency market remains extremely unpredictable, but the STO system contains real assets that must comply with the compliance criteria of the issuing legislation, which means that they have to complain about the regulation of the issuing country in general terms and are not only valued for speculation.
Due to their digital nature, STOs can be provided via digital platforms that are not only cheaper than an exchange but can also reach investors all over the world. Relative to other forms of financing, tokenisation has a strong added benefit for companies. There are six different criteria for identifying the sources of funding (Exhibit 1).
Exhibit 1. Different attributes to compare the sources of financing
Advantages to move forward with tokenization
In his book "Assets on Blockchain," Max Kops emphasises the importance of TRUST and TRANSPARENCY in the transfer process of tokens. Ensure that the provided note is still valid tomorrow, which is accomplished by the use of the distributed ledger, as once the information stored on Blockchain becomes unchanged and immutable. When the note (in this case the token) becomes stored on Blockchain, it can be traced.
A full compliance is also required to the issuance an STO, some countries as United States, Luxembourg, Switzerland, Singapore, Liechtenstein, among others, are leading the new regulations to Digital Assets to protect investors and enable funds to include this form of assets in their portfolios.
Some of the advantages of STO's is that it allows for the FRACTIONAL OWNERSHIP of an asset. In the case of Real Estate, this function opens up the market to low-capital investors, as if the asset can be divided into, i.e. 100 or 1000 security tokens, the price of each token would be a fraction of the full price of the asset, allowing for small (retail) investments. Nevertheless, the token would work the same as the entire asset it represents, and the returns from them will be proportional to its fractional ratio.
As comparison to legal contracts, the token has the advantage of providing ACCESS TO GLOBAL CAPITAL MARKETS. When the token has been established with an interoperable standard framework (the implementations are completely harmonised to operate with other systems without any restrictions), it can be easily implemented globally and incorporated into various delivery networks.
From the company's perspective, tokenizing their assets represents LESS TIME AND COST compared to traditional fundraising instruments. Unlike stocks, STOs do not need intermediaries, allowing lower issuance costs and becoming the standard choice for many companies. On the other hand, due to the fact that the technical issuance process can be mostly automated, the time required from the decision until the issuance execution is reduced.
Nowadays, one of the qualities that generate the most value in the digital world is the possibility of having a SECURE STORAGE of your information. Hence, storing assets on a Blockchain in the form of a token is much safer and less useful for a single point of failure than traditional, centralised systems sometimes have.
· One special kind of digital asset, the security token, is on the rise.
· Security tokens are essentially digital, liquid contracts for fractions of any asset that already has value, like real estate, a car, or corporate stock.
· Using security tokens means investors can expect that their ownership stake is preserved on the blockchain ledger
Kops, M. (2019). Assets on Blockchain: Security Token Offerings and the Tokenization of Securities . Independently Published.
Weimin Sun, Xun (Brian) Wu, Angela Kwok. (2019). Security Tokens and Stablecoins Quick Start Guide: Learn how to Build STO and Stablecoin Decentralized Applications. Packt Publishing Ltd.