Security Tokens for Dummies: Security Tokens Defined and Explained

“Any new technology will find its success when it has found a perfect way to balance the values of its traditional manifestation and the advantages of the new technology.” Scott Macy

Firstly, a “token” simply means a unit that represents something tangible in an ecosystem. 

Tokens in the context of Blockchain

Previously, In the context of the blockchain, “Initial Coin Offerings” were “tokens” used as a  method for raising funds for cryptocurrency projects and decentralized applications.  Unfortunately, many enthusiastic entrepreneurs, who managed to raise money, weren’t able to transform their vision into a viable product and joined the vast graveyard of failed start-ups. However, the utility value of the new technology remained strong and regulators soon defining frameworks within which the new technology could thrive. 

The transparency, security and immutability of blockchain remained, and the whole crypto world was on a lookout for a fine line where the value of “traditional security” was combined with the technological advantages offered by the blockchain. 

The convergence of the traditional security and the technology of the blockchain created a new kind of token: the Security Token. 

What is a “Security Token?”

Firstly, whether or not a token is deemed a security is decided on by the Howey Test, a legal doctrine from the US that has influenced legislation in many jurisdictions. The conditions for anything to qualify as a security are: 

• The security should involve an investment of money or some assets tangible in the real world. The underlying asset supporting the Finka Token is the La Pradera Cattle Ranch
• The investment should be done expecting profits
• The investment should be a common enterprise
• The profit shouldn’t be determined by the investor, but rather by promoters and third parties

What does a “Security Token” represent?

A security token represents fractional ownership in a real-world asset i.e. the La Pradera Cattle Ranch. The real-world asset here is a profit share. Note that unlike a utility token, a security token represents a tangible fraction of an asset that has value even outside of the crypto ecosystem. 

A security token also needs to be compliant with the legal and regulatory requirements of the SEC. They act as bridges between the legacy finance, and the blockchain world.  

What are the benefits of Security Tokens?

• Credibility: Security Tokens are bringing back the credibility lost due to the malpractices that ruined ICOs and blockchain tokens 
• Democratisation: Security tokens have democratized the world of investments. Investors from any jurisdictions are able to invest in projects in any part of the world. This translates into a greater number of investors and increased liquidity. 
• Improving the world of Finance: whilst traditional financial transactions can be expensive because of middlemen like bankers, security tokens reduce the fees required for the middleman to be involved. 
• Less time restrictions: Security Tokens aren’t confined by trading a window. They can be traded at any time. 
• Faster Transactions: Security Tokens can be issued relatively quickly thanks to the elimination of third parties and the middleman. 
• Increased Transparency: Security Tokens bring in more security and transparency to the investment process without the involvement of third parties. 

What is a “Security Token Offering”?

A “Security Token Offering” is a crowd sale that involves the selling of tokens which represent fractional ownership of a real-world asset in some form. 

What types of Security Token Offerings exist?

• Equity Tokens: representing the value of shares issues by the company on a blockchain. The difference between an equity token and the traditional stock is that an equity token is recorded on an immutable blockchain and a stock is not. 
• Debt tokens: these represent debt instruments such as corporate bonds and real estate mortgages. 
• Asset backed tokens: represent ownership of an asset like commodities, real estate or art. Blockchain technology allows for transparent record-keeping of the transactions. This eliminates fraud.  

To conclude, there is strong consensus that Security Tokens are the future of investments and the future of finance. Moreover, they hold huge promise for society as a whole by allowing investors from the developed world to invest in the developing world. This is because Security Tokens allow any investors from any jurisdiction to invest – without a middleman. This increases access to investments to retail investors. These investments will increase liquidity in the developing world, holding potential for society as a whole. In terms of the world of finance and investments, Security Tokens represent significant development due to the removal of the middleman, increased transparency, faster transactions and less time restrictions on trades. The Finka Token is a first of its kind security token, and hopes to set a benchmark for security tokens in the future.