Everyone is talking about security tokens in Australia (and around the world).
It’s the Next Big Thing in Blockchain, following on from the utility token boom that was spawned by the creation of generic ERC-20 tokens that anyone with a laptop can knock up in 20 minutes.
The global market for assets is expected to be worth $900 trillion by 2020. If just one percent of it is tokenized, then security tokens will account for $9 trillion of value. No wonder investors are getting excited.
So what is a security token and how does it differ to a utility token?
WHAT ARE UTILITY TOKENS?
Utility Tokens provide the user with some tangible benefit – usually access to a blockchain based network or service or product.
The Nauticus Coin is a good example, providing users with 50 percent off transaction fees when trading crypto on Nauticus Exchange.
VeChain Thor is another example, providing payment to the node holders on a decentralized blockchain network, allowing a company to record a product’s journey along the supply chain.
Although many crypto “investors’ think they’re buying a slice of the company, utility tokens are more analogous to buying prepaid credit for your phone that allows you to make calls on the network infrastructure. No one thinks they own the phone company after they’ve topped up their credit.
WHAT ARE SECURITY TOKENS?
Security tokens, however, DO provide ownership of a slice of the company, or of real assets like gold or silver, debts/loans. As such they fall under existing security laws.
They can provide dividends and shareholder voting rights and they are bought in the expectation of future returns.
In the US they use the Howey Test to determine if a token is really a security:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
SECURITY TOKENS: HOW ARE THEY DIFFERENT?
Muddying the waters is the fact an awful lot of ‘utility’ tokens are really security tokens in disguise. The SEC in the US has clearly stated its belief that many existing tokens are actually securities. Here in Australia, lawyer John Bassilios, from Hall and Wilcox has laid out a convincing case that the vast majority of utility tokens are actually disguised Managed Investment Schemes. Managed Investment Schemes require the operator to hold an Australian Financial Services (AFS) licenceand to register the scheme with ASIC – meaning many coin projects could well be breaking the law.
WHY MASQUERADE AS A UTILITY TOKEN?; SECURITY TOKENS IN AUSTRALIA & THE US
Utility tokens are by and large unregulated. You can raise a bunch of money by selling them with little to no oversight. Security tokens on the other hand, are regulated by large, intimidating organisations such as the SEC in America and ASIC in Australia. They require prospective issuers to get a bunch of licenses and jump through regulatory hoops. In short, they come with a bunch of regulations designed to prevent the exact kind of scams and sharp practices that have infected every aspect of crypto fund raising.
WHY TOKENIZE YOUR COMPANY OR ASSETS?
While they are more difficult to set up than a utility token, Security Tokens are considerably easier and cheaper than trying to float a company on the stock market. They enable smaller companies to raise funds quickly, while maintaining a much greater level of control than if they were a publicly listed company.
TYPES OF SECURITY TOKENS
Equity token – An STO where each token represents stock in the company. Holders have the voting and dividend rights of stock holders.
Reserve Assets Token
Companies that trade commodities such as gold or real estate can launch tokens which are backed by a reserve of real world assets.
Companies that don’t wish to tokenize stock or assets can raise funds by issuing debt tokens with a promise to payback with interest to attract debt investors.