Many industry leaders in the crypto market consider security tokens to be the instruments that can replace traditional stock exchanges and conventional OTC markets. Going by their popularity and the rapid rise of their use, this prediction seems possible within the next 10 years. Security tokens are completely different from crypto tokens.
What are Security Tokens
Security Tokens are the devices by which the user gains access to a network service. A token can serve many purposes like having a voting right, value or stake. They grant the investors profit share rights, equity rights, voting rights, and buy-back rights. They are governed by the US Securities and Exchange Commission (SEC) regulations. These are the financial securities that represent the investor’s right to the underlying assets. Smart contracts record these rights and they can be sold or traded on a Blockchain exchange.
Types of tokens and how they work
Utility tokens and security tokens are the two types of security tokens in ICOs. Security tokens add an extra layer of security for the users to have access to a network system with more sensitive data which needs utmost privacy. These are used in combination with passwords and secret phrases, to confirm the real identity of the user.
For a few cryptocurrency services like Bitcoin, security token systems make use of cryptographic keys to allow access of the portfolio assets by the respective owners. But, these stored keys must be secured safely to protect time-sensitive passwords. Biometrics like fingerprint scanners can also be used to ensure that access is granted only to a single person.
Impact of security tokens
- Security tokens remove the need for middlemen and thereby make the transactions cost-effective and quicker.
- Since the creators have a wide reach on the internet, and it is an unregulated market, this makes it appealing for new and existing investors.
- The professional fees that users pay for external service providers can be eliminated.
- There will be more transparency in the investment and liquidity will increase as you can trade on secondary tokens.
- But, since these are unregulated utility tokens, ICO space lacks credibility until it can integrate with crypto space. The biggest drawback is that ICOs do not categorize tokens as securities and you can’t trade them freely.
Why is the market bullish
There are unlimited use cases which are brought in by the tokens. Institutional investors believe that it can bring regulation to the market which is very much required with regards to cryptographic tokens. Big bankers back the security tokens and this is expected to bring more liquidity to the territory of the securities market. Security tokens provide secure, cost-effective and quicker trading solutions.
Using programmable security tokens and automation services in the securities market, you can minimise or remove the need for a back office. Many companies use smart contracts for their business needs and even though this still is in uncharted waters, support from more investors can leverage the power of blockchains. Hence, there is a tendency for the market to be bullish towards security tokens.
Security tokens have the potential to create a complete transformation and disrupt the financial system. Security tokens are suitable for use by start-ups and well-established businesses alike. All they need to do is make tokens for their securities, rather than list their shares on the stock exchange. There are many developments unfolding which make the future of these tokens on par with the impact created by bitcoin in the cryptocurrency market.
Disclaimer: “This article was contributed by the CEO of Blackmore Group, Phillip Nunn. Entrepreneur, financial expert, corporate evangelist, fintech and crypto trading authority, Phillip is an industry speaker and renowned thought leader on topics such as Fintech, Cryptocurrency, and Blockchain technologies. Follow his blog at https://phillipnunn.co.uk/phillips-blog/ ”