Security Tokens: Blockchain and Real-World Assets United
After cryptocurrencies blew up the world, huge money began to be invested in them. Then, a serious investment in tokens and initial cryptocurrency offerings began. Along with the influx of funds,fraud cases have increased. This attracted the attention of state bodies, which were strongly concerned about the safety of people who were mindlessly investing in ICO. Then, the SEC (Securities and Exchange Commission) proposed to use a Howey test to define if the token has securities features and can be named a security token. Experts feel like they will make a huge breakthrough in the future. Many believe that the future of the cryptocurrency world is behind this type of tokens.
What are the security tokens
A security token is a new token, which, in essence, is a digital share. That is, by purchasing such a token, the buyer becomes the owner of a real asset, unlike conventional crypto investing in a project with questionable profitability. In this case, the investor receives a real digital share. It can be:
- a share of the company capital
- a share of any other asset, such as company property.
The security token owner can have a variety of rights. He may be the owner of a share or receive dividends, debt payment or the right to vote. There can be a lot of options, but it is the security token that can be called the object closest to securities in the traditional sense.
Security tokens are the legal answer to SEC
2018 was a year of heated disputes over the legal status of cryptocurrencies and ICO. One of the bodies that paid the most attention to this problem was the US Securities and Exchange Commission (SEC). In the first half of the year, there were numerous scandals in the United States regarding various dubious ICO projects. Suffice it to recall only the scandal with the Bitcoiin project, with Steven Seagal as the poster boy.
It had come to the point that the SEC issued an order according to which certain types of tokens are equated to securities. Because of this, there were many new cases. The problem of the bloated market and fake ICO reached such extent that it was necessary to urgently find a solution.
The difference between security and utility tokens
Utility token is a useful token. In fact, it is a cryptocurrency. That is, its owner gets certain opportunities when using any products of the company acting as an issuer. Accordingly, the owner of such a token gets access to any additional features, but nothing more. For example, he can pay for the purchase with utility token. The most basic example is the internal currency in online games.
The security token is a completely different type of token. This is an asset that allows you to get any profit in the future.
How to determine what kind of a particular token belongs to? The Howey test, accepted by SEC, will help.
ERC20, ERC721, ERC777, and other Ethereum token standards
Answer the following questions:
- Will you get real income?
- Is investment the main task?
- Can you receive income from a third party?
- Will the money received from the asset sale be invested in the company?
If the answers to all these questions are ” Yes ” – you are buying a security token. In other cases, it is a utility token.
Security token examples
Bcap (Blockchain Capital)
Blockchain Capital is a successful project of Brock Pierce, Bart Stephens and Bradford Stephens. Blockchain Capital is the first company offering a security token. Its ICO brought huge improvements to the existing token sale industry. First, only the accredited investors could give funds to the project. Secondly, Bcap became a pattern for future security tokens offerings. The Blockchain Capital token sale was extremely successful. Bcap reached the hard cap of $10 M within a couple of hours. The earnings were transferred to a Blockchain Capital Fund. Its managing partners get 2.5 % management fee and a 25% performance fee. All other token holders get the remaining profits.
It is a fund and a startup incubator focused on Blockchain investments. The fund was raised based on the security token offering (STO). Token holders get 70% of the income from portfolio startups. Plus, it is expected that the fund’s revenue will be used to re-buy the tokens – it is called a buyback program.
The project’s goal is to transform the industry of venture investments with the use of the tokenized model. It offers great liquidity to the investors. The company is focused n security tokens for now, and its first portfolio company is Securitize. However, in the future, SPICE VC is planning to enter the utility token market.
Sia is a p2p cloud storage blockchain platform. It allows hosts to lend their storage capacity to the renters. All the participants of the platform use utility tokens – Siacoins to pay for deals. But there is another type of tokens at the platform – Siafunds. These are the tokens that the platform receives from renters and hosts as a network fee – it’s about 3.9% of the total spending.
750 Siafunds, out of the total 10,000, are offered as a reg D security token by the Nebulous company – the operator of the Sia platform. This is a great example of a dual token usage.
In all cases, the tokens meet all the requirements of the Howey test. Accordingly, we have real security tokens.
Security tokens as a new step to a reliable ICO
Unfortunately, fraud in the ICO continues to be a huge problem. A large number of projects will never see the world, which means that investors’ money will remain in other people’s pockets.
The main mechanism of protection is the literacy of investors who should look not at beautiful pictures, but at the prospects and teams that are behind these projects. Also, the current practice of freezing ICO funds and unlocking part of them after the implementation of the team’s promises (at least a couple of them) is very helpful. Nevertheless, further regulation will completely transfer a part of the tokens to full-fledged securities. This will become an additional mechanism for the investors protection by the state bodies. In addition, the prepared legal framework will expand the opportunities of offline companies to attract investment through the token sale, which is much cheaper and faster than the classic IPO.
Read more blockchain related articles