ICOs (initial coin offerings) have declined substantially in recent years. Consequently, STOs (security token offering) have paved pathways for regulated, efficient and secure crowdfunding on the blockchain.
Security token offerings are regulated and, in most cases, backed by underlying tangible and intangible assets. They are known for generating regular returns for their issuers while providing stability and liquidity for investors.
What is Security Tokenization?
Security tokenization is the process of materializing a security’s ownership with token issuance mechanisms using distributed ledger technology (DLT). Security token offering enables the tokenization of securities like equities, bonds, or investment funds for trading and other business opportunities. We find these securities everywhere, but they are difficult to transfer or subdivide physically. As a result, buyers and sellers use paper trading or share digital files representing assets in an insecure way. Indeed, they are difficult to transfer and trackback. The underlying assets of a traditional security lack transferability, too. For instance, if the underlying asset is a piece of property, transferring its ownership will require cross-selling. However, with security tokenization, one can share the ownership rights of an asset easily with peer-to-peer trading mechanisms.
Also Read: STO vs ICO Marketing | A Rundown of Difference to Help You Choose the Right Way
Benefits of Security Token Offering
Automation
Security tokens can automate several service functions generally carried out by middlemen. Currently, many levels of intermediation often complicate communication between the security issuer and the investor. However, the security token offering simplifies and automates the processes with smart contracts.
Shared Information and Transparency
Security Tokens eliminate the asymmetry of information that occurs during the ownership transfer of security. Blockchain as a central source of truth makes governance and ownership more transparent and reliable than a traditional private security offering.
Cost-Effective
Traditionally, middlemen charge significant fees for acting as the validator of security transfers. By using blockchain technology and smart contracts, issuers can cut out expensive intermediaries required while offering securities as tokens.
Immutability
Currently, financial institutions rely on centralized, private databases. Here, blockchain shows its value. Once an investor buys tokens on a blockchain, nobody can erase the ownership history. Once data stored on a blockchain, not even a system administrator, can change it. It is highly beneficial during auditing. Investors can validate that their data is genuine.
Use cases of Security Token Offering
Real Estate
Security tokens enable individual and non-institutional owners of real estate to sell shares of their land and further convert it into cash. Token holders earn profits on capital and a certain percentage of the property’s future cash flows.
Raising Debt and Equity
As financial markets have become quite complex, security token offerings give companies an alternative to traditional institutional investors. Their compliance with SEC (Securities Exchange Commission) regulations cuts the trust barrier that traditional ICOs struggle with.
Art Ownership
Having possession of fine art and other assets such as vintage cars highly consider as a status symbol of wealth and luxury, reflecting the owner’s ability to spend a big sum of money. In the year 2016, $56.6 billion was auctioned in art markets. Here, the token issuers and holders benefit from liquidating art assets without institutional auction houses in place.
Fundraising for Charity
Honestly, charities always struggle to gain the public’s trust to distribute their capital. It is quite shocking that only 57% of people give charities their vote of confidence. The transparency of blockchain technology and accurate tracking of funds will facilitate charities to function freely. Charities conduct security token offerings via platforms such as Lottery.com that assures distribution of their member’s donations effectively. Token holders can be quickly updated with how their funds are being utilized at the project level.
Fundraising for Artists and Musicians
A selected group of record labels dominates the music industry that creates 80% of the market. Security token offerings enable individual musicians to fund their tours and projects.
Conclusion: Security Token Offering
With the security token offerings, the traditional concept of ownership transfer has changed drastically. It won’t be wrong if we say that the tokenization of security will play a vital role in money management for many years to come. Check out how Cliqcube helps you navigate through the complex world of security tokens with its STO development services.
