As 2019 comes around, crypto commentators produce numerous predictions, but one theme that is consistent is the fact that the majority are calling 2019 the year when security tokens truly take off.
It’s now been ten years since the first Bitcoin was mined.
While Initial Coin Offerings might have tarnished the “utility” label as a way to skirt regulation, utility tokens do genuinely exist. The initial utility token, Bitcoin, was made up of the objective of incentivizing security and giving permission to access the Bitcoin Network. The network itself would be functionless without the role that the token plays in the system’s architecture. Its value is driven by wide-open market demand for it.
With tokens, today we can transmit value anywhere on the planet using the simplest smartphone connected to the internet, without having the involvement of traditional monetary systems acting as a middleman facilitating transactions. This means value transformed in bits of code that are transferred online and in real time. The value that these bits of code represent are determined by the network and the user.
Even though blockchain technology and cryptocurrencies have already made its mark in regards to value transactions, we have just recently begun to witness its most powerful feature. The tokenization of traditional securities entering the blockchain ecosystem removes middleman exchanges, giving individuals unprecedented power over property and wealth. This revolutionary concept means that ownership to an underlying asset will be connected, by law, to a digital token on a system. Investment contracts, bonds, and stocks are being legally tethered to lines of code that offer monetary rights to the proprietor, e.g., voting rights, earnings share rights, equity, redemption rights, and dividends.
Think of conventional assets as mailed physical letters and tokenized assets as emails. Bitcoin initially brought us programmable cash, and now we are discovering the potential of programmable securities.
Tokens Will Consume Finance
The global monetary system has improved immensely due to the digital age. Relative to pre-internet days, there’s no longer reliance on anything physical in the process. Nevertheless, digitalization only allows streamlining to a certain degree. By tokenizing individual securities, assets could be traded on secondary markets without the issues that concern conventional private securities. The advantages of a solely digital monetary structure are able to permit a future where the security token sector is able to surpass the US public equities space in the following decade. Presently there are $544 Trillion worth of property globally which could become tokenized on blockchains due to four primary reasons.
A Bitcoin can be divided to one-millionth of a coin. The very same principle can be applied to a security token. The majority of traditional assets have a minimum purchase requirement that brings friction to investors. Ideal allocation of a property has been historically difficult due to various degrees of speculation.
Wall Street battles to scale to meet up with the brand new global digital economy that keeps on growing in an ever more connected planet. Cumbersome ledgers between the worlds various economic centers represent a barrier. Before Bitcoin, just increased centralization of powers could break them. A brand new ledger network protected by open and public blockchains have paved the way ahead for the trading of securities.
Regulation, compliance, and restrictions are programmed into every token. In the case of global securities, an investor might have a portfolio that consists of publicly traded companies from around the world. The efficiency of tokenization allows for a single portfolio to be made of an unlimited amount of organizations from around the globe. Each one of those global companies could account for just pennies in the totality of an investment portfolio.
It is estimated that in The United States alone there 20 million small businesses. The potential future where the vast majority of them become tokenized securities means that trillions of dollars secured on blockchains divided in individual portfolios around the world.
Smart contracts that execute automatically predetermined commands on the blockchain facilitates fully programmable securities, removing middle man from operations. This advantage directly relates to our very first 2 points, making sectional ownership economically interesting for an investor. While trades might rapidly execute on traditional exchanges, property settlement still takes quite some time. The necessary documentation that confirms the transfer of ownership in the right time and price might take up to months. The same property confirmation transfer done on the blockchain could be performed within minutes.
With a security digitally tied up to a smart contract, the exchanging process of that specific security between sellers and buyers can transfer peer-to-peer. Brokerage firms and banks can be removed entirely from the operation since regulations compliance is coded directly in the token. The Decentralized exchanges (DEXs) are increasingly becoming much more efficient, diminishing the barrier of entry and facilitating more participants in the financial system.
Liquidity is merely the capability to switch an asset into cash. Private securities, for example, offer little to no liquidity. One of the reasons is that buyers and sellers can’t easily find each other. Each transaction has limitations on shares or interests. Even if a buyer is found the transfer of ownership is difficult. There are many cumbersome requirements for the issuer to deal with.
Similarly, take a work of art as an example. It could be worth millions of dollars that the seller has to displace, in a market where only a handful of buyers have the resources to participate. Often the seller needs to reduce the valuation that causes absence of liquidity. This scenario is known as an illiquidity discount that can go up to 30%.
Tokenized securities open a new market for illiquid assets, making them tradable just like any other. This benefit will force companies and institutions to embrace tokenization in order to stay competitive in an ever-growing global marketplace.
The security token industry impressive growth opportunities
Large institutions are undoubtedly looking to take advantage of the fascinating prospects of the crypto space through innovate fintechs. Finally, blockchain technology-focused investment vehicles have become irresistible due to their high-potential investment nature. They’re tempted by increasing transparency and stability in an industry that until only a few years ago was considered restricted to tech geeks. While an institution friendly ecosystem is an essential requirement for significant institutions to get onboard the crypto wagon, the real lure continues to be, unquestionably, the extraordinary opportunities for returns and growth the security token market provides. Take Binance for instance. Within a year, it grew from an ICO project to the world’s largest cryptocurrency exchange which has just recently surpassed one of the leaders of global finance, the Deutsche Bank concerning profitability.
The security token trillion dollar market
This rise in activity has more than spurred investor interest, establishing the market on an irreversible track to the trillion dollar mark that several professionals conservatively forecast for the security token market within the next few years. More aggressive projections propose that security tokens volume could mature to eight trillion of dollars by 2024, that could be nearly two times the GDP of Japan.
This amusing reality has produced powerful financial imperatives due to the developments in the security token industry, further cementing its position as the only viable crypto instrument effective at delivering a sustained institutional investment interest. One particular aspect is evident; for Predya, one of the numerous players in the security token industry, as well as, for the entire crypto community, a higher number of initiatives will inevitably result in much more institutional focus, more effective products, and ultimately, a significant forward movement for the entire crypto industry. Most remarkably one step closer to the proverbial trillion dollar mark. One thing is sure, after so much volatility and struggle the entire blockchain community will be able to mark a big win when the security token movement truly gets going.