Security tokens as digital shares: The future of securities trading?

Securities: Cumbersome and outdated

Despite their fungibility, securities as a type of investment have two problems: Trading with them is extremely bureaucratized and very cumbersome. Investor protection laws of recent years should provide security when investing through transparency, but significantly complicate trading in securities. Trading in securities also always involves ancillary costs, which can quickly reduce foreign exchange profits and returns. If you open a securities account with a bank, there are custody costs; if you trade stocks, you must pay transaction costs. There are also trading fees, because it makes a difference whether you trade via the computer-based Xetra system or buy directly via the trading floor in London or Frankfurt. This is compounded by the fact that trading in assets and direct investments such as real estate, ships or containers has so far only been possible via secondary markets. All of this makes investment in securities extremely complicated. One solution is therefore to tokenize assets via the blockchain!

Tokenization: From ICO to STO

ICO, STO and tokenization: What does this mean and, above all, what does this have to do with securities and investments? Basically, cryptocurrencies function as digital vouchers, so-called utility tokenwhich companies that offer blockchain-based services issue to users in return for payment. When you buy the coins of a blockchain start-up, you usually get access to the company's service. If a provider offers its cryptocurrency for the first time, this will Initial Coin Offering, called ICO for short. However, ICOs are only successful in around half of the cases. The system has also been exploited by fraudsters in the past. In addition, disillusionment has long since set in in in the crypto economy following the Bitcoin binge.

Another use case of blockchain technology is that Security Token Offering, STO for short. They offer a real alternative to traditional securities trading on stock exchanges. In contrast to the utility token who provide ICOs Security Token is a type of digital security. You can yourself Security Token present as a digital share of a company cryptographically secured via a blockchain. Companies decide Security Token offer for sale in an STO in order to generate equity or create debt capital through the sale. It is therefore the same process as with traditional securities, except that the combination of blockchain offers major advantages in terms of costs, speed and flexibility. STOs are therefore always financing methods and differ fundamentally from classic cryptic currencies such as Bitcoin and Co., apart from the use of blockchain technology.

What makes STOs and their trade so special?

With STOs, many of the problems of traditional securities trading on stock exchanges are solved in one fell swoop. Where securities and direct investments can only be traded in a cumbersome and expensive way through intermediaries such as banks, stock exchanges and brokers, Security Token Simply traded from peer-to-peer (P2P). You can buy the tokenized digital shares in a company directly from the company during an STO. The cumbersome route via stock exchange, banks and stock portfolio is no longer necessary. Your STO purchase is also stored on a blockchain in a forgery-proof manner. The private resale of your Security Token is just as easily possible from P2P. The option of tokenizing asset financing for real estate, for example, and issuing it as fragmentary digital securities is particularly interesting. Anyone who wants to purchase a real estate investment but does not have enough equity available can, through an STO - Security Token sell to raise borrowed capital. The investors then use the purchased tokens to participate in the income from the rental (minus costs) and the potential increase in the value of the property. As a result, thanks to blockchain technology, an illiquid and inaccessible market can also be opened up for retail investors without the requirement of a long commitment or an unattainable amount of equity to participate.

The tokenization of their company shares also has a significant advantage for companies themselves compared to outdated securities. In order to sell them, companies must “go public” and set up a joint stock company in return. The effort required to complete a traditional IPO is huge. The tokenization of shares, on the other hand, is simple and technologically fast. Now even small and medium-sized companies can sell ownership shares in order to create capital. Another advantage of Security Token: The blockchain never sleeps! Trading with Security Token is possible 24/7. In contrast, stock-based securities trading in Germany usually takes place between 8:00 a.m. and 8:00 p.m.

Regulation of STOs in Germany

Da Security Token Financing methods are subject to BaFin's prospectus and approval requirements. Security Token You can therefore understand it as a blockchain-based security with which you participate in the profit or loss of a company or an asset. As a result of BaFin's monitoring, investors in Germany benefit from a high level of transparency. As a result, the potential risks of the investment can be assessed much better. However, Germany does not yet have its own marketplace for security tokens. Elsewhere, however, the incipient hype about STOs is already being advertised. The stock exchange in Gibraltar already allows trading via Gibraltar Blockchain Exchange with Security Token.