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How Do Security Token Offerings Improve the Traditional Securitization Processes?

  • Security token offerings have improved traditional securitization in a number of ways
  • They allow specific rights and restrictions to be programmed to each unique digital asset, and maintain a complete audit record for each transaction
  • They also eliminate an escrow service so exchanges can take place more quickly

In recent years, the blockchain industry has boomed in terms of relevance, going from having a cult following to being the talk of the town among financial investors and stockbrokers. From Bitcoin to Ethereum, multiple forms of blockchain cemented their relevance in the market. One type of blockchain technology to watch out for is tokenization or tokenized assets. It’s a recent development in blockchain technology that continues to take the industry by storm.

Security token offerings (STOs), tokenized assets and tokenization are proof that blockchain technology can be used as a means of generating new opportunities for securitization. In 2019, preliminary data has shown that 87 different institutions are estimated to have raised $562 million from issuing shares via STOs alone. Although tokenization and STOs are revolutionary, most people don’t know what they are. 

For the uninitiated, here’s what you need to know about security token offerings and tokenization:

1. Tokenization

Tokenization is the process of creating a digital unit of ownership for any class in a distributed ledger system or blockchain. Each tokenization can have a digital right to certain tangible or intangible assets, such as bonds, stocks, luxury goods (e.g., gold and diamonds), real estate, and commodities. Additionally, tokenization allows multiple users or investors to take a share of a single asset, such as a luxury car or gold bar, effectively creating a fractional ownership model comprised of multiple tokens. 

2. Smart contract

A smart contract is a type of unique code on a blockchain system that assigns specific data or attributes, links documents, and proves that any digital asset is tokenized. 

3. Security token offerings

Security token offerings (STOs) are defined as the act of issuing a new type of digital asset, which represents a traditional type of security to a certain group of investors or users. When used effectively, STOs can offer a more secure way to invest due to their ability to improve the traditional securitization process. 

How do security token offerings improve the traditional securitization process?

With the effective development of blockchain technology and tokenization, security token offerings have been able to significantly improve the traditional securitization process. Reduced overhead costs, the creation of operational efficiencies, enhanced liquidity, and improved market infrastructures are just a few of the multiple benefits that come with STO-enhanced securitization processes. Traditional securitization processes are improved significantly by STOs for these very reasons:

STOs offer the ability to program specific rights and restrictions for every unique digital asset

Compared with the traditional securitization process, STOs can make transactions more secure by implementing a smart contract that manages and enforces rights and restrictions. The programmed rights and restrictions prevent certain actions, such as duplication or any form of fraud, upon exchange. These measures were previously deemed impossible with traditional securitization alone.  

STOs can execute trades between two digital assets without an escrow service in real-time

By cutting out the third party, STOs improve the traditional securitization process by enabling two different parties to exchange a certain representation of value directly. Without the interference of an escrow service, exchanges are much faster in near-real-time—similar to that of physically exchanging two things. 

STOs maintain a complete audit record for every token transaction

Every single event, trade, and asset transfer is recorded on the blockchain through a secure system that can be queried at any point in time to yield real-time information. Compared with traditional securitization processes, which are prone to mixing up physical audit records, STOs effectively complete audit records in real-time. 

Security token offerings continue to prove that blockchain can revolutionize the way the world works. By using STOs to improve the traditional securitization process, it becomes much easier to conduct safe, stable, and convenient transactions.

If you’re looking to learn more about STOs and how they improve traditional securitization, get in touch with STO Filter to see how we can help!