Hype topics pop up regularly in the crypto industry that heat up tempers and make a few people very wealthy, ranging from ICOs and DeFi to memecoins and NFTs to the Metaverse. Relatively unnoticed, however, there was another rather minor hype about so-called security tokens around the year 2019, which has never really taken off to date.
The use case for security tokens is basically quite simple: you are trying to map an existing asset class, namely securities such as bonds, as tokens on a blockchain. Instead of issuing documentary securitization which is stored in a central custodian, the securities process should be mapped as lean as possible via blockchain and tokens. After all, as with payment transactions, there are certain inefficiencies in the securities industry that can be overcome with smart contract infrastructure – at least that’s the theory.
Innovation is only allowed to a limited extent
The catch: Unlike ICOs, regulators have a say in security tokens. A digital securities issue must meet the same BaFin standards as a traditionally securitized securities issue. In addition, not all securities may be issued in all jurisdictions. In Germany, for example, there is still no appropriate law for shares in symbolic form.
This circumstance shows that innovation or further development in the security token sector is mainly domestic and less international – unlike cryptocurrencies. More patchwork, rather than a global and decentralized project. It should also be noted at this point that security tokens actually have nothing to do with the crypto market. They are simply based on the same core technology, namely blockchain and tokens. This should already provide a first explanation why most crypto enthusiasts don’t care about digital securities: it’s a completely different world.
Security Token: Where are the flagship projects?
Bureaucratic verification procedures, near-no supply, no secondary market, and ultimately unattractive securities or yields caused the sector to flop rather than take off. Until now, apart from innovation, there was hardly any reason why a private investor should buy a security token.
Neither in Germany nor in the world was there a flagship project, a flagship show, which investors dreamed of. If you managed to achieve successes, then rather on a small scale. Terraced houses in Hamburg, which were financed for 1.4 million euros via platforms such as Finexity or Exporo. Or a handful of corporate funding like that of Tomorrow Bank through the crowdfunding platform Wiwin ensures that the security token industry does not come to a complete halt, at least regionally.
Security token: better or just more complicated?
While cryptocurrency service providers, especially crypto exchanges, often make a fortune, security token service providers have a harder time. Virtually no transactions, minimal volumes, low investor conversion due to bureaucratic KYC and AML requirements, high regulatory set-up costs, low margins and ultimately, even if not expected, far too many intermediaries again. If the Ethereum blockchain is also used, you can say good night. With a cryptocurrency growing sixfold in 12 months, you might be willing to pay $90 in gas fees, ultimately ordering fees, for a purchase volume of $1,000.
But if it’s a security token that offers a return of, say, 4.5% per year – typical token-based real estate financing – the math hardly works for those who have to bear the costs. . Even if the issuer or issuing platform bears the cost, most investors with an appropriate investor profile may prefer the convenience of buying a dividend-paying stock through their in-house broker.
Digital titles and electric cars
As easy as it is to disparage security tokens, however, it has to be fair to say that it would be damn naive to think that the digital securities industry can thrive like the crypto industry. Security Token’s promise of innovation is not wrong, it just takes a lot longer than originally expected. You cannot superimpose the brutal innovation dynamics of the crypto industry on the highly regulated and saturated securities industry.
What you need to understand: Digital titles are just as inevitable as electric cars and self-driving. We don’t know when autonomous vehicles will hit our roads, but we know it will. The same goes for digital titles. Just as our money is going digital – that doesn’t primarily mean bitcoin, but euro or US dollar – our securities will also only be issued purely digitally in the (distant?) future. If you turn a blind eye to security tokens, you turn a blind eye to the digital future.
Forget the terms!
In ten years, no one will talk about security tokens, just as the term CBDC will no longer be used to refer to central bank digital currency. These are current fortune constructs to distinguish themselves from the (sometimes analogous) mainstream norm, namely documented securities or cash. Especially since terms such as security tokens are often legally misleading or quickly lead to misunderstandings. According to the case law, they can be structured in different ways and be subject to different requirements.
This challenge is reflected, among other things, in the particular German way of the class of crypto securities created by the Electronic Securities Act (eWpG). Cryptographic securities are a response to the sometimes complicated adoption attempt to represent securities in digital form. The regulatory uncertainty of security tokens and the resulting limited usability should be overcome with the help of German cryptocurrencies. The German language idiom alone is likely to cause confusion internationally when it comes to security tokens, which are actually not security tokens at all, but cryptographic securities. Creating international standards, especially European standards in the first place, in this area could still be a lot of fun.
Cream Pie or Rudi’s Resterampe?
It is not yet possible to say whether the new crypto securities will mean the breakthrough of digital securities. Ultimately, the success of digital securities depends on their attractiveness compared to alternative forms of investment. The oft-vaunted democratization of private equity through security tokens or crypto securities will only succeed if retail investors have access to promising projects. Otherwise it’s still time: The shares of cream go to institutional and professional investors and Rudis Resterampe then remains with the small common investor. Ultimately, the added value of digital securities must be reflected in competitive return – measured against the risk/opportunity profile. Everything else is marketing.
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