What exactly is a security token?
Securities tokens are virtual assets with the features of securities that use distributed ledger technology (DLT). The US Securities and Exchange Commission (SEC) started to regulate fundraising through initial coin offerings (ICO) in 2017, and the notion of secure token offering (STO) was developed.
The act of seeking subscriptions for the purchasing of freshly issued security tokens is referred to as a STO.
A security token is a distributed ledger-based digitalized security of a financial product or other asset in the form of an encrypted token.
Security tokens are often recorded on both distributed and controlled ledgers in reality.
STO differs from IPO (Initial Public Offering) of securities tokens in that it is conducted via a private placement or crowdsourcing rather than a general public offering, which is free from the need to file a securities declaration.
STOs have extremely low brokerage fees, save time, and have the benefit of being widely accessible to small investors by tokenizing assets and selling shares.
Another benefit of tokenization is that the liquidity premium of assets rises, and the investor base may be enlarged by using a virtual asset trading platform. In contrast to the ICO (Initial Coin Offering), which has a minimal degree of regulation, the STO offers a better level of investor protection via transparency and unfair trading legislation.
Even though security tokens are virtual assets, regulatory authorities pay attention to their securities qualities and regulate them in the same manner as securities are. STOs are authorized in the United States and Europe as long as security tokens meet with securities rules such as investor protection requirements and market order compliance, and policy talks and litigation to integrate them into the institutional system are underway.
What is the security standard?
Securities properties define what qualifies as a security (investment contract). The Howey Test is used in the United States to evaluate whether a transaction constitutes a “investment contract.” Disclosure and registration requirements to be regarded securities apply, according to Supreme Court precedent under the Securities Act of 1933 and the Securities and Exchange Act of 1934 in the United States.
According to the Howey Test, an investment contract exists when “funds are invested in a joint venture that reasonably expects to gain from the efforts of others.”
This test may be used to evaluate any contract, plan, or transaction. The Howey Test is essential when it comes to implementing blockchain and digital currency initiatives with investors and project supporters.
To evaluate the security of virtual assets, the United States used the ancient “Howey Test.”
In other words, if an investor anticipates a benefit from a joint project and a profit is achieved as a result of the receiving entity’s efforts, it is considered a kind of investment contract.
Article 4 (5) of the Capital Market Act defines investment contract securities as a “contractual right in which a specific investor invests money, etc. in a joint project between the investor and another person and receives profits and losses primarily from the joint project performed by another person.”
Security token characteristics
The most important element of security tokens is a programmable smart contract that employs Distributed Ledger Technology (DLT). It is efficient because the smart contract function can automate back office duties (distribution distribution, anti-money laundering, disclosure, and so on).
Some say that STOs are 40% less expensive than IPOs. Furthermore, since it is automatically recorded on the distributed ledger, the issuing process’s transparency may be increased.
Participants in the Security Token Market
The issuer (primarily a blockchain company), the issuance platform (the primary subject of the issuance of security tokens and a similar role to the host company in Korea), the custidian, the transfer agent, and the trading platform (alternative exchange), broker-dealer (similar to domestic investment trading and brokerage authorization), and others are all involved in the issuance of security tokens.
The topic of issuing securities tokens and attracting investments using blockchain technology is the issuer.
The regulation of securities issue necessitates suitable permission for issuance, but the procedure is difficult, so in the United States, a professional issuing platform is a one-stop service, and the name of the name, broker-dealer, and even secondary transactions are all available. There are several examples. The representative issuance platform ‘Securitize’ offers not only the issuance protocol (token programming), but also a transfer agent and a secondary market exchange platform.