The Next Big Thing in Cryptocurrencies: Exploring the Benefits of Security Tokens
January 16, 2019
I find cryptocurrencies fascinating. They touch on key questions of our lives. How does money work? Who controls it? Why do some people have more than others?
Over the past few years, cryptocurrencies have experienced a number of permutations. From Bitcoin to utility tokens to security tokens. Where Bitcoin derives value from being alternative money, and utility tokens derive value from their utility—security tokens reflect the value of the underlying asset.
One of the most common manifestations of a security token is as a share in a company. The ownership of such a share can be represented by a paper certificate (not so common anymore), a spreadsheet, or a token on a blockchain.
Having a token ownership certificate instead of a paper one makes a lot of things easier, both for the issuer of a share and the investor who purchased it. But, of course, the big reason we are seeing the insurgence of security tokens is because the regulators, such as the SEC, are cracking down on projects that have not complied with existing fundraising regulation. And because successfully drumming up demand for a token sale in the current, deeply pessimistic, cryptocurrency market requires something new and interesting.
To be clear, a token sale that complies with the fundraising regulation is not a better investment compared to the one that doesn't. Fundraising regulation has a lot of issues, from how your level of sophistication as an investor is determined (hint: it's your net worth, not your investment skills), to how product disclosure statements work (most people don't read them). A good investment is one where the right team is solving the right problem, at the right time. Whether it has jumped through all the regulatory hoops is less relevant.
Security tokens are a return to compliant ways of raising money, with a blockchain twist.
The Promise Security Tokens Hold
I've been following security tokens closely for the past few months. In the process of doing so, I've been exposed to some pretty controversial ideas and met some pretty colorful characters. Some claim that security tokens will end poverty as we know it. That's a nice thought. But poverty has many causes, and access to investment opportunities, or lack thereof, is just one of them.
Sure, security tokens make access to investment opportunities easier. But this should not be the end goal. It's the quality of those opportunities that matter. If you take a bad investment and put a token on top of it, it is still a bad investment. A pessimistic view is that security tokens will give rise to many useless investments that'll compete for our attention in an already crowded space.
So, will security tokens democratize finance and lift millions out of poverty? No, at least not right away. But will they transform how we invest and eventually how we live? Absolutely.
Security Tokens Could Lower the Barrier to Entry for Newbie Investors
Starting to invest early, in your 20s, not your 40s, is always a good thing because the earlier you start the longer you have to take advantage of the miracle of compound interest. So why don't people do it? Lack of money and fear of the process are cited commonly as reasons for not investing. And it's worse for women, who are half as likely to invest as men. I can certainly relate. It took me too long to open my first shares trading account. I remember being intimidated by the process, and not knowing if I had enough money to start.
Blockchain makes it more economical for the issuer to offer smaller bits of an investment, in effect to "fractionalize" one large investment into smaller, more affordable chunks. We will see a proliferation of investment opportunities where a minimum investment is under $10 instead of hundreds or thousands. These small investment opportunities will hopefully nudge more people to start investing earlier.
How Security Tokens Could Reduce Investment Fees by Lowering Post-Trading Fees
Trading in and out of investments is an integral part of investing. Any time your retirement fund trades on your behalf, you pay trading and post-trading fees. Security tokens eliminate the need for post-trading fees. It's not rocket science—without the post-trading fee, you can expect more money to remain in your retirement account.
Post-trading fees are something that stock exchanges have been charging us for years. When Kate sells a share to Mike at an agreed upon price, the trade is executed immediately, while the actual transfer of the share takes time, up to two days in most cases. This is no longer required with security tokens because they are the asset and the registry, two-in-one.
Security tokens are not a silver bullet, but they do offer incremental improvements, which over time can amount to a new and better way to finance projects, invest, and co-own your country's own assets. And with new applications for security tokens, like the ability to invest in clean, renewable energy via assets like solar power, solar batteries, etc.—investors can put their money behind opportunities that are changing world issues, such as climate change.
Anya is a crypto economist at Power Ledger, an Australian-based company using blockchain to bring clean, renewable energy to all. Crypto economics is an emerging field that combines blockchain technology, financial markets, business models, and game theory. As a crypto economist, Anya has an exciting job of trying to master all of the above, understand what's essential and what's not, and designing new cutting-edge software products for Power Ledger customers. Much of her time is spent coming up with ideas for things that have not been done before.
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