Tokenization of securities is a process where the ownership of an asset is divided in to multiple units and they are issued as tokens. These tokens are stored and transferred on to a blockchain.
The very commonly tokenized assets are real estate tokens. For instance, the Security Tokens from Leaseum Partners for NYC based real estate property. However, several other real world assets are converted to tokens for issuance.
The assets that are commonly tokenized are bonds, derivatives, stocks etcetera. A very notable security feature with these security tokens is that they will be issued in complete compliance with law and regulations. The compliance factor makes these tokens desirable by institutional investors.
The restrictions imposed on the private securities concerning secondary trading makes private securities less liquid. There are lot of costs related to the actual trade and as well costs to ensure that they are working in compliance with regulations. A majority of these costs are transferred to the investors and therefore many investors defer from investing.
By using a digital infrastructure, it is possible for tokenized securities to be created, traded, issued, settled and cleared. This can be done without any kind of assistance from third party intermediaries. The costs that should otherwise be paid to clearing houses, brokers, transfer agents, and several such services are reduced.
In addition to this blockchain technology has a major role to play when it comes to automating regulatory compliance. This includes status verification like accreditation and the status of the investor. This eventually eases the secondary trading process. This reduces the price meant for investing eventually motivating more numbers of participants to buy and trade the liquidity of the securities.
While breach of security is a major threat in the blockchain, particularly for private block chains there are lot of methods to “cheat the system”
Apart from these arrangements, companies who are issuing security tokens are making the additional arrangements to ensure that their tokens are issued in complete compliance with regulation.
Several jobs in the traditional investment process like underwriting the deal, taking care of the security, ensuring regulatory compliance are all roles that are shifted to the issuer.
In order to bring the best of the security token ecosystem, it is important to integrate technical and regulatory infrastructures. Several countries have already developed such an ecosystem. Technologically upgraded blockchain infrastructures that provide for regulated creation and issuance of security tokens are developed by everyone as a norm.
Countries like Switzerland are building integrated exchanges with appropriate infrastructures for their digital assets based on the distributed ledger technology customized to suit the exchange.
While the regulatory norms and customization of technological upgrades seem like deterrents they are in reality opportunities that will work for the best when the issues are resolved.