Security Token – Digital securities of the future
Even people who have no experience with the still quite new and complex world of cryptocurrencies have certainly become aware of certain hype topics in the industry in recent years in various news reports. Whether DeFi (Decentralised Finance), ICOs (Initial Coin Offerings), NFTs (Non-Fungible Tokens) or the so-called Memecoins (e.g. Dogecoin) – there have been quite a few reports about some people who have won a lot of money in a very short time – or lost it again just as quickly.
For some time now, financial magazines and specialist journals have also been increasingly drawing attention to so-called security tokens. The basic principle of these is relatively simple: an existing asset class, such as securities like bonds, is to be mapped in the form of a token on a blockchain. Instead of a classic securitisation and the need for a central custodian, the securities process with the security token should remain as streamlined and uncomplicated as possible. In this way, the known inefficiencies and possible delays of the classic securities market are to be improved thanks to digital infrastructure.
One advantage: while money and non-cash tokens are viewed with scepticism in the financial world, also due to the strict attitude of supervisory authorities and legislators towards the new digital solutions, security tokens are meeting with more and more (supervisory) legal acceptance. Security tokens are also gradually finding their way into the fund and securitisation industry. It is important to bear in mind that security tokens are more of a kind of vessel than an independent asset class. From the point of view of European legislators, such tokens backed by “tangible assets” are now on a par with classic securities.
High standards and growing acceptance of security tokens
However, unlike ICOs and their dubious reputation, the regulators of the financial world also have a right of control and a say in security tokens. The digital issuance of a security must meet the same high regulatory standards as a traditional issuance . So far, however, not every security can also become a security token, since, for example, the digital possibilities have not yet been fully implemented in commercial codes and in stock corporation law.
One goal of tokens, especially security tokens, is not only to reduce costs in the financial sector, for example for transactions, but also to significantly increase processing speeds and to reduce various “intermediate steps” and bureaucratic processing aspects. Unfortunately, the breakthrough of security tokens has not only lacked acceptance and openness to financial innovations on the part of institutional and more traditional investors, but also significant lighthouse projects and success stories.
Security Token and Crypto: Like Tortoise and Hare?
Quite a few sceptics of the security tokens complain/criticise or moan about the rather unspectacular profits, minimal volumes, low margins, too many middlemen or too high set-up costs, especially in comparison to the crypto exchanges. But one would be doing security tokens an injustice to compare digital securities 1:1 with the cryptocurrency sector. Security tokens are innovative, but they take longer to break through than originally assumed. The traditional world of securities is struggling with digitalisation, as a conservative, saturated and strictly regulated market is confronted with imponderable innovations and supposed “wild west” methods. Offers in the area of secure custody of security tokens also simply need time.
Whether money or securities – at some point everything will take place on a purely digital level. The current world situation, numerous crises, the Ukraine war, inflation, demographic change and, in particular, the existing shortage of skilled workers require a rethink and openness to new, innovative and digital solutions in finance and investment. After all, it is not only important to find the suitable and “right” investment opportunity, but also not to lose sight of the associated costs.
In particular, the costs for safekeeping, transactions and administration are factors that investors can adjust to optimise their returns on investments. Security tokens are an important step, even if the path is not free of minor hurdles due to a lack of specialists or required technologies. It is hard to imagine an investment class without cryptocurrencies today. Consequently, the successful and efficient digitalisation of traditional investments, not least in the form of security tokens, is only a matter of time.