Demystifying Security Token Offerings

Demystifying Security Token Offerings

By Allen Walters | Publish0x posts | 12 Apr 2020


STO is short for Security Token Offering. STO's are tokenized assets. This means that value of the asset, is represented by tokens that are registered on a blockchain. These Tokens are classified as a "Security", which are assets that are strictly regulated. 

What makes STO's different from other tokens and offerings?
For these type of tokens, all limitations that are necessary to comply with regulations are registered and enforced on the blockchain through sets of smartcontracts. This means for example, that anyone that wants to trade STO's will need to register and verify his or her identity. 

"Each investor has his Identity validated by a KYC/AML provider which assign a unique Hash ID associated with a wallet address or wallet addresses On-Chain (which count as one beneficial owner for the providers) which will rule how the investor interact with the custodian and the issuers. All of those, have specific smart-contracts that will mimic the old-fashioned way [of registering, trading and enforcing regulations.]. Those smart contracts will rule the way they interact together, and a transaction will be validated once some permissioning modules are checked." - Equisafe

This lack of privacy goes against your values as a crypto enthusiast? You want privacy and private transactions? You ask yourself why this use-case would be interesting for any of us? The answer is simple. This is a traditional investment. It is an actual real-life use-case applied on blockcain. This is adoption. It might not be for you. (Although I imagine that diversification is something all of us do. And some STO's could be a perfectly safe diversification.) But the use-case does bring something for crypto. Platforms that will see heavy usage of STO's will see a serious uptick in the amount of transactions that are made on chain. And fees are payed in native tokens (like XTZ for Tezos), so if this use-case takes off, you might profit most if you own the native token of the blockchain platform that these STO's are launched on.

Which type of assets are we talking about?
The assets that can be tokenized in STO's are regulated assets that have the potential to produce income. Some examples are:
Commodities, business debts, -loans or -credit, royalty agreements, investment contracts, real estate, etc.
Lets take the example of real estate. Tokenizing real estate is a use-case that is about to get some real traction. If we look at Tezos, we see that over 3 billion dollar value of real estate STO's have been announced so far. The first tokenization on Tezos took place in the beginning of March this year. 

Real estate has value. To tokenize that a piece of real estate, you take the actual value, lets say 1 million dollars, and divide it into tokens. Lets say 100.000 tokens of 10 dollar. The amount of tokens is fixated on chain, and from the moment the STO is launched, the tokens can be traded. If demand rises, so does the value of the tokens. If demand drops, so does the value of the token. People buying the tokens will have to do some research on the property and compare prices with other properties, just like anyone would do for any investment in real estate. Don't expect the value swings you see in cryptocurrencies. STO value will probably follow the same trend as its real world counterparts. What makes STO's interesting is the fact that these investments are relatively safe, but generate income. (Like rental income in real estate.) What makes STO's revolutionizing, is the fact that in traditional real estate investments, not just everyone can participate due to the fact that traditionally, you can't buy small pieces of real estate. So people with limited funds can't commonly invest in real estate. Which is a pity, since it is considered to be quite a safe investment. And as mentioned, real estate is being rented, which provides passive income. This income will be distributed to STO holders. So for people with some long-term savings this mght be an option. Banks give no interest over your savings. A well picked real estate STO might be a great alternative. And in the form of STO, it is a lot more accessible since people with smaller budgets to invest, can now take part in the real estate market too. Investments can start somewhere in the range of $100 to $250.
So STO's should make investing in traditional assets like real estate, way more accessible. This is exactly the goal of Bilal el Alamy, co-founder of STO platform Equisafe: "We believe it should be as easy as to invest as it is to buy a book on amazon." 

If we look at Equisafe, we notice another advantage of blockchain based STO's.

"In addition to being an investment tool, the platform is also a management tool for companies, and other issuers of financial securities, to handle their governance closely with their investors. Indeed, blockchain technology allows time-stamped automation required to handle e-voting & general meetings, capitalisation table management, pre-programmed rights and automate a certain number of business rules, including real-time verification of investor profiles that, for example, speed up compliance checks to verify the permissibility of a transaction.
Built on Tezos, our platform does not emancipate itself from any intermediary: on the contrary, it offers them the possibility of emancipating themselves from their tedious tasks by providing collaborative tools where your lawyer, notaries, and expert accountant can participate efficiently in a specific workflow."

To put it short: registering an asset on a decentralized blockchain has more advantages besides making investing more accessible. There are huge advantages on the management side of the spectrum. Also legal processes will be cheaper. If we just look at the KYC/AML process that is traditionally necessary for investments. Registering on a platform that uses blockchain technology, can save some serious money on legal costs. Just one example:

"Do you think it’s legitimated that for 5 investments you pass a 5 KYC/AML Checks? Humm… Moreover, do you believe that your lawyer creates value by reading the contract and all legal documents to verify if the sale is permissible? This time is billed from €500 to €2000 whereas Equisafe can do this into 1 second." - Equisafe

So if we tokenize assets on a blockchain, we can tap into the full potential of the trust-less and automated database that a decentralized smartcontract platform on blockchain is.

One of the most advanced smartcontract sets designed for STO;s is the NYX Standard. The NYX Standard shows the possibilities of smartcontract usage for this purpose:

NxY standard will enable:
⦁ The creation of global register of immutable financial transactions operating on a basis of a harmonised set of rules
⦁ The creation of an anonymized database of investors using “Zero-Knowledge Proof” cryptographic methods, fully secured and accessible 24 hours a day by issuers of financial instruments and regulators.
⦁ The automatic verification of the conditions of the transferability of securities.
⦁ On-chain custody of securities
⦁ Automatic monitoring and encrypted statement of transactions at any time.
⦁ Automated “delivery versus payment” of crowdsale.
The last couple of points are directly following the recent Bank of France’s request for proposal concerning stablecoins.

Everything that the asset investment ecosystem needs, can be fixated on chain and automated in a safe and immutable way. It saves time, it saves money and it opens up the door for participation of a substantially larger group of potential investors.

How do you rate this article?


4

0

Allen Walters
Allen Walters

Fascinated by blockchain and future proofing cryptocurrency. Discover the tech before it gets relevant. Twitter: @IgnoranceIt


Publish0x posts
Publish0x posts

Posting my opinion and feedback on Publish0x here.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.