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Security Token Exchange: How Does It Work?

It won’t be an exaggeration to say Cryptography and Blockchain are the new future. There are some daily innovations and advancements in the field of Blockchain, and hence it becomes essential for us to be aware of these changes.

And one such product of innovation in Blockchain is Security Tokens, offered by platforms called Security Token Exchange.

“As per a report by Chainalysis, a company involved in Crypto Adoption Index, the crypto adoption grew over 880% in 2021 with Asia and Africa being the biggest participants.”

The term Security Token Exchange is not alone in itself; it accompanies other concepts such as Security Token Offering (STO), Security Token Exchange Platform, etc., which we’ll look at as we move further in the article. So, without any further due, let’s begin.

What Is STO (Security Token Exchange)?

A security token exchange is a marketplace where the users can trade, i.e., buy or sell securities such as shares, bonds, gold, or other financial products.

The only difference is that these assets are tokenized on a blockchain and hence are less prone to any breach.  

Tokenisation is the procedure of providing random alphabetical or alphanumeric addresses to the actual address of the assets to reduce the chances of a data breach.

Banks and government agencies highly imply the concept of tokenization to secure customers’ confidential details such as card details, account details, addresses, etc.

Security Token Exchanges Vs. Normal Exchanges.

These security token exchanges differ from the regular exchanges in terms of the product they have, i.e., tokenized securities and the processes involved. Normal exchanges generally have the involvement of middlemen such as banks and brokerages, while the Security Token Exchanges don’t have any such mediators involved.

Some famous Security Token Exchanges around the globe are Securitize, tZERO, INX, etc.

Now, as we have read about Security Token Exchange, let’s understand:

What is STO?

Security Token Offering or STO is launching Security Tokens for investors in pursuit of raising funds. An STO is highly advantageous over ICO, but one aspect, in which both are the same is the fungibility of the assets. The assets offered in STOs and ICOs are generally fungible, i.e., interchangeable with any other asset or thing having an equivalent value. 

The emergence of Security Token Offerings (STO)

However, STOs were not always part of the game. They gained popularity after the 2018 crypto market crash when the ICO bubble busted. With a more return-centric approach and less attention to security parameters, ICOs lured a significant number of investors and raised over $10 billion. However, as stated, the ICO bubble busted out due to improper security implementations. STOs then entered with more proper governance and regulations, and since then, it has seen decent growth.

Real Estate STO

Over the years, STOs have seen applications in the field of stocks, bonds, and most notably, in the Tokenization of real estate assets (such as Registries and REITS).

Out of all companies launching their STOs, most of them seek investments for real estate property or trust. 

In case you are interested to know more, here is our blog on Real Estate Tokenization.

Utility And Security Token

Out of all the categories of crypto and tokens present, the two major categories are Utility Tokens and Security Tokens. Utility Tokens are generally used to access Decentralised Apps (DApps) or use services on blockchain-backed platforms such as apps or websites.

However, as per SEC (Securities and Exchange Commission), a token is considered a security if it falls under the definition derived from a famous case of SEC vs The Howey Company, popularly called The Howey test. The Howey Test states that:

“An investment contract is (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others.”

If a token doesn’t satisfy the above definition, it is considered a utility token.

Types Of Security Tokens 

Generally, the security tokens are broadly divided into three categories:

  • Equity Tokens:

    Equity tokens are similar to that of IPOs, where a person holding a share or equity in a company is given legal documents. The only difference is that IPOs documents are stored in databases and in the form of PDFs, while these equity tokens are registered on the Blockchain.

  • Asset-Backed Tokens:

    Asset-Backed Tokens are the tokens that represent the real asset itself. They are the digital equivalents of physical assets such as gold, bonds or real estate.

  • Debt Tokens:

    Debt Tokens are the loans given to the company or person in the form of a security token. Since these tokens are stored on different types of blockchain networks, therefore, it is harder to breach the contract.

STO vs ICO vs IPO:

Since we know what STO is, let us understand what ICOs and IPOs are.

Initial Coin Offering (ICO) is a similar event to that of an IPO, just being launched on a crypto trading platform. ICOs usually offer utility tokens which are further used to access DApps and other blockchain services.

One other aspect of ICOs is providing investors with monetary benefits by allowing trading and staking facilities. 

An Initial Public Offering (IPO) is launched by a company when it decides to make its share available to general investors (or the public). IPOs provide early access to the investors to invest a lumpsum and hence book good profits. 

The main difference between these three is that the IPO launch happens on centralized stock exchanges of the respective countries. While ICOs and STOs take place on both centralized and decentralized exchanges (Dex).  

Refer to our blog for a detailed comparison between STO and ICO.

Advantages Of STO:

An STO has many advantages over ICO, but a few main benefits are listed below:

  • STOs are more secure than ICO

STOs go through various security checks and must comply with their launch regulations. Therefore, they are deemed to be less risky than ICO.

  • STOs are cost-effective

As we know, ICOs involve mediators and proper legal counsel, while STOs employ smart contracts, which reduce their issuance costs.

  • Fractionalisation of Assets

This helps in making investments more accessible. For example, with the help of Tokenisation, a property worth $1 million can be distributed among 1000 buyers for $1000.

Some Popular Security Token Exchange Platforms

There are various centralized exchanges available on the internet that sell securities. Some popular ones are Binance, FTX, Coinbase, KuCoin, Kraken, etc.

However, there are various decentralized exchanges as well that offer securities to customers. Some of them are UniSwap, PancakeSwap, DODO, etc.

Some other Security Token Exchange platforms are:

tZERO 

tZERO is a security exchange based out of North America. It is currently trading one security, Tzero Equity Token.

Index

INX is an exchange for securities based out of North America and open to accredited investors globally. It currently offers trading in six security tokens, viz. INX, SPiCE VC, Blockchain Capital, Protos, Science Blockchain, and 22x Fund. 

There are other security token exchange platforms available out there as well.

Hire Prolitus For Asset Tokenisation

We at Prolitus have a legacy of providing innovative and scalable solutions to our customers. Among our core services which include NFT Development, DeFi Wallet Development, DApps development, and many more, Asset Tokenisation is also something we excel at.

Under Asset Tokenization, we provide Coin/ Token Development, Real Estate Tokenisation, Gold Tokenisation and many other services. 

With our Tokenisation Platform Development, convert your physical assets to digital tokens and trade them over exchanges. With trained experts and a great marketing team, we provide you with the best-in-class service. When you choose us, we not just ensure the delivery of your product but also future consultation for your doubts.

So, what are you waiting for? Contact us for further queries.

FAQs

  • What Is A Security Token Exchange?

Security Token Exchanges are the platforms that allow users to trade securities such as stocks, bonds, gold, real estate investment trusts, etc., over the internet. The only difference is that these securities are tokenised, i.e., stored on the Blockchain.

  • What Is Sto?

Security Token Offering or STO is issuing tokens or crypto to users. These tokens represent an underlying asset, such as stocks, bonds, funds, etc., in pursuit of raising funds by an organisation or a company.

  • How Is Sto Different from Ico?

An STO is different from an ICO in terms of security and cost. An STO is highly secured compared to an ICO and has a lower issuance cost than an ICO.

  • Is STO Legal? 

There is no clear answer to this question, as crypto adoption is still in progress. Due to this, many countries are forming rules and regulations regarding crypto and blockchain products. Thus, we can say STO may be considered legal in emerging times.

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