Are Security Tokens the Third Wave in Fintech?

Jack Chia, MD of Cryptology:

For securities trading, the benefits in application of blockchain technologies display in three areas: circulation and liquidity, versatility and security, and securitisation of new assets.

Circulation and liquidity

The current structure of the securities market means that cross-border transactions are limited to a few exchanges only, and can often be slow and costly – trade reconciliation work has to be done manually, along with other labour intensive database tasks. Token exchanges have the potential to solve this – they now operate 24 hours, 365 days a year, trading is relatively liquid and transactions are settled in the same working day with no clearing period, otherwise known as ‘T+0’.

Furthermore, these tokens can be traded in Satoshi units, which have nine decimal places – enabling smaller trades to be done and lowering the investment threshold, meaning more people can invest than ever before.

Versatility and security

Industry adoption of security tokens could also provide some strengths when it comes to versatility, as they can have a high degree of interoperability. By tokenizing any form of asset, you open it up to be traded for a much wider range of things, like security tokens, utility tokens or digital currencies, rather than just another security token.

The decentralized ledger system also means that it would be more difficult to hack compared to a centralized server system, making ownership of the tokens more secure.

In addition, security tokens offer more security than other cryptocurrencies, as everything is linked to the individual’s ownership. For Bitcoin, if you are a victim of a hacked account or someone gets hold of your private keys, the Bitcoins in question would most likely be gone and the chances of you proving ownership of the Bitcoins are slim.

However, due to a tangible underlying asset, security token hacks take a different form. While hacks could lead ownership to be debatable, the asset in question will still be there. And as long as the company issuing the security tokens has been through sufficient Know Your Customer (KYC) checks, ownership can be resolved. Furthermore, stealing a security token from someone would leave a transaction record on the blockchain, which is the digital equivalent of leaving your fingerprints all over the crime scene.

Securitising new assets

Tokens are unique in that that they can securitize various forms of assets including both tangible and intangible assets. This has already had some success, with the recent auction of Andy Warhol’s 14 Small Electric Chairs, an iconic contemporary art piece featuring an electric chair, allowing art lovers to buy a share in the painting.

This would also contribute to liquidity and interoperability of assets, as these small units can subsequently be traded.

This goes beyond art – in the future we can expect to see assets like office buildings operating on a fractionalized ownership model, allowing smaller investors who previously would not be able to afford investment in this asset class to participate.