Security tokens are completely changing how investors access and own assets. But do you understand what security tokens are? This guide seeks to demystify this type of token as well as explain how it works.
What Are Security Tokens?
Security tokens represent ownership rights in real-world assets like real estate and art. In other words, a security token securitizes an asset with tangible value. Also, it provides investors with real and transferrable rights to the asset.
For instance, our Security Token Offering (STO) allows investors to acquire our security token $MSTO, which gives them fractional ownership rights in the Millennium Sapphire (pre-sale is complete and public sale will be announced at a later date). The Sapphire is a 12.3 kg natural carved gemstone that has been certified as the largest in the world by the Guinness Book of World Records (2001). It was recently valued at up to US$ 150 million.
You can also view a security token as an investment contract because it signifies an agreement between the company and the investors. In this agreement, the investors help a company raise capital, and in turn, they obtain ownership rights in the underlying asset.
A security token is created on a blockchain. To illustrate, we’ve used the Ravencoin blockchain, an asset tokenization platform, to create our token. The use of blockchain technology means that there is transparency, and investors can easily verify ownership rights.
Security Tokens Versus Utility Tokens
There are two main types of tokens: security and utility. Here is how the two compare:
The table above clearly differentiates the two types of tokens. From an investor’s viewpoint, a STO is a better and safer investment than an ICO.
How Do They Work?
Let’s say you have an asset and you want to raise funds. You can create a security token on Ravencoin or Ethereum to represent ownership rights in this asset. On Ravencoin, for example, creating an asset is easy. You simply need to download the Ravencoin wallet and follow these steps:
- Click “Create Wallet.”
- Set up a PIN that you can easily remember every time you need to open the wallet.
- Write down the passphrase and store it in a safe place. Note that you will need this passphrase to recover your coins when you shift to a different device.
- Once you are all set up, go to “Create Asset.”
- Enter the name of your asset. Click “Check Availability” to view if someone else is using it.
- Input the token quantity and units. The units are the number of decimal places.
- Select whether your token will be re-issuable or not.
- Next, if you have added ownership, titles and other documents to IPFS, paste the hash.
- Pay the creation fee of 500 RVN and hit “Create.”
You can confirm that your asset exists by opening the Ravencoin asset explorer in your browser. Search for the asset and wait for the results.
Now that you have a token, the next step is advertising and marketing your project to attract investors. Moreover, you will need a platform where investors can purchase the token with ease.
Once an investor buys your security tokens, they will gain ownership rights in the asset. However, their ownership is fractional. This is what makes securitized assets more affordable than assets bought the traditional way. For example, buying the Millennium Sapphire traditionally would cost investors hundreds of millions of dollars. However, purchasing the security token that represents ownership rights in this carved Sapphire will only cost investors a minimum of $500 during the presale period.
Furthermore, any potential earnings generated through the ownership of the Sapphire may be distributed pro-rata of an investor’s token holdings in the form of special dividends. What this means is that an investor with 100,000 tokens will receive a higher dividend than the investor with 10,000 tokens.
For investors to trade their tokens, you need to list the token on a crypto exchange. There, investors can sell and buy the token 24/7. The value of the token will then rise or fall depending on the performance of the market, company performance and the underlying asset.
The Advantages of Security Tokens
Security tokens offer several advantages. They include:
- Liquidity: traditionally illiquid assets like art can become more liquid when tokenized. That is because investors can trade security tokens on a regulated exchange.
- Easy Liquidation: the ability to trade security tokens on an exchange enables token holders to easily liquidate their tokens.
- Fractional ownership: one asset can be owned by many people instead of a single entity. This allows small investors to create wealth through assets that are typically accessible only to the super-rich.
- Efficiency: blockchain technology offers speed, automation, and transparency. These characteristics are important for the creation and transfer of security tokens. Also, it makes the traditionally long and tedious fundraising process less costly and shorter.
- Transparency: investors can verify their ownership rights on the blockchain. This creates trust between the company and its investors and clarity for all parties.
- Lower risk: security tokens are subject to securities regulation making them a lower risk investment compared to utility tokens.
- Potential global adoption: security tokens have the potential to experience fast global adoption and integration into various distribution platforms. For this to work, an interoperable standard is needed. This entails a set of rules that work across borders.
- Borderless: security tokens are borderless because eligible investors can access them from anywhere in the world through crypto exchanges.
Real Use Case
The Millennium Sapphire security token offering is a real use case for security tokens. We’ve used the Ravencoin blockchain to create the token. Our project will likely be the largest fine art STO in the world.