The magic of issuing stock on the blockchain
By Simon Moser
Tokenized securities are often seen as one of the most promising opportunities of blockchain technology. They could not only disrupt the financial asset industry, but also redefine the meaning of ownership. As one billion dollar company after the next one is trying to get its piece of the pie, blockchain enthusiasts are advised to keep themselves up to date about this new and exciting business field.
Why the change?
While the current system of issuing and managing shares is undoubtedly fully operable, there are still many aspects primed for a change. Transforming old paper shares into programmable securities would not only unlock a global trading potential, but it also greatly improves the control of all shareholders.
Issuers take advantage of an automated whitelisting process, setting up trading rules, and tracking their shareholders. Of particular interest would be the last point, as it grants directors and board members the opportunity to maintain overview of their investors and to keeping relationships with them on a high level.
On the other hand, investors profit from simplified standard processes such as voting, dividends and reports. In some cases shareholders could also benefit from a dual-token model, where an additional utility can be applied to unlock special features like access to software, memberships and discounts.
Security Token Offerings (“STOs”) are also direct competitors to Initial Coin Offerings (“ICOs”), the crypto company funding method of choice in 2017. In contrast to STOs, the coins and tokens emitted during the process of an ICO usually don’t grant any traditional investor rights like voting or dividends. In Patrick Byrne’s own words, CEO of Overstock: “The ICO craze of last year created a toxic waste dump of financial assets”.
What keeps us off?
The trend of issuing stock on the blockchain has already started. However, it’s not as easy as it might seem. Current challenges certainly include the technical side, but most importantly the lack of security token exchanges, which is a result of obscurity in terms of legal situations in many jurisdictions.
In the United States, the strict rules and guidelines related to securities, as mandated by the SEC, is putting a spoke in the security token industry’s wheel. Especially strict rules about the whitelisting process could represent a great obstacle for getting the ball rolling.
Although it’s still very early, there are already several major players building the necessary infrastructure for this shift in the finance industry. Overstock subsidiary tZero aims to build the first operable security token exchange within the States, the company raised $200 million in an STO in 2018 and is aiming to launch its platform in later this year. Aboveboard, the first company ever to distribute its stock on the Blockchain, is working on a registry software to handle whitelists and to track shareholders.
At the moment these projects are only promises to investors, but this may change very soon and propel the blockchain space to a whole new level.
What does the future hold?
The applications for securities tokens are endless: Real estate, precious metals, stocks, bonds, art and more assets can all be tokenized. Although tokenization comes with many benefits, one of the most relevant ones is the fact that it unlocks value. Assets like real estate or private companies are often valued at a discount due to its lack of liquidity, bringing them on a blockchain in the form of a token can have a colossal positive value impact. This fenomena is often referred to as liquidity premium. As the world becomes aware of the incredible benefits that securities tokens bring and platform to develop this ecosystem launch, we will be another step closer to a more transparent, efficient and fair world.