Security Token

Written by Steve Miller

Introduction

Security Tokens represent fractional digital ownership in an underlying pool of assets like real estate, commodities, or equities. Commonly referred to as STOs, Security Token Offerings, commonly focus on tokenizing assets that are traditionally difficult for investors to access. As security offerings, STOs, are subject to the same regulatory requirements as traditional debt and equity issues. A variety of protocols have launched building these requirements directly into their tokens using smart contracts to ensure security tokens issued via their platforms adhere to the relevant regulations.

Illiquid asset classes, like real estate, are one use case for security tokens. Tokenizing real estate opens up the opportunity for ownership to be exchanged on secondary markets via the buying and selling of the tokens representing shares in the underlying pool of assets tokenized. Harbor’s R-token (regulated token) protocol is designed to facilitate issuance of security tokens for traditionally illiquid investments like real estate.

Another use case is providing broader access to traditional investments to investors outside of their home market. Universal Market Access, UMA, launched an S&P 500 token allowing non-US investors the opportunity to more readily gain exposure to the S&P 500 by buying the token instead of trying to directly buy the S&P 500 under the constraints imposed by their home markets.

A challenge for scaling the issuance of security tokens is that platforms launched to date have been mostly proprietary. Assets issued on proprietary platforms are locked in unless they are willing to reissue on a new platform. To overcome this hurdle, a set of standards, ERC-1400, was developed to ensure security tokens can seamlessly move between platforms whose design specifications incorporate the standards.

Suggested Reading

The Security Token Thesis by Stephen McKeon

Security Tokens Explained for Beginners (Everything You Need) in The Tokenist