We are in the next financial services revolution. Digitization and Distributed Ledger Technology are combining to create new value and opportunities for a more efficient global marketplace for investment opportunities which will impact many sectors and market participants.
The ‘tokenization of securities’ is an important next step for the Token Economy and wider financial markets.
The tokenization of a security or asset, is a process to allow potentially faster, cheaper and more programmable formats of the underlying asset or instrument to be transferable between eligible parties within a ‘digital wrapper’. This could be a right to money, property or represent a physical asset like a building, art or jewelry. In an equity context, tokens can represent shares in a business. Security tokens may be programmable representations of financial instruments and can imitate the economic behavior of the underlying asset. They can also represent other forms of fractional ownership or rights to money arising from revenue or the sale of the asset. The tokens are fungible, and tradeable subject to compliance with applicable securities laws.
Representing something with a token makes it easier to track ownership.
Each token has a unique identifier and owner, which can be logged in a register which stores that investor information and all relevant transactions on the blockchain in a secure, tamper-proof manner.
Information is updated in real-time and immutably in a reliable and accessible way where the responsibility for the accuracy of information doesn’t rest with one party.
Faster, easier transfer of beneficial ownership, removing transactional friction. With fewer third party processes required, transaction fees and timelines are reduced.
While fractionalisation isn’t new as such, tokens do allow greater direct access by more investors to specific assets (e.g. a building) that was not previously possible outside an intermediary or costly and inflexible corporate structures.
With data collected effectively and securely, you can be more informed to build higher value and more targeted investor communications.
Able to lend more easily against equity e.g. tokens transferred to lender or held in escrow pending repayment of loan.
Open Exchanges: Access to new liquidity/markets as the regulated security token exchanges come on-line in 2019; Closed Exchanges: Opportunity to create internally managed exchange/transfers.
Ability to add features to the token e.g. hold >X tokens to qualify for benefits/access rights (can tie it to a loyalty scheme) or a tenured voting programme i.e. the longer you hold the tokens, the more votes you get.
Tokenization or ‘doing’ an STO does not turn an ugly duckling into a swan. Put another way, ‘tokenization’ in and of itself does not turn create substantial new value where none existed before.
Undertaking an STO without legal, technology and investment advisors who are coordinated in the delivery of the process is unlikely to succeed. In short:
There is no ‘one size fits all’ yet and different standards and protocols are emerging in the market. We review each project on a bespoke basis and take a ‘top-down’ approach focusing on the practical needs for the issuer and pursuing the key benefits of tokenization, rather than forcing it into a particular protocol proposal.
We’ve created a general solution for permissioned tokens, including asset backed digital assets and securities.
Rockchain’s solution uses ERC20 compliant tokens in concert with a particular set-up of Multi-Sig wallets, that gives an authorized representative full control over transferability, KYC/AML and any other obligations demanded by the legislation or agreements between the Issuer and Token Holders.
An authorized representative (we call them the Controller) can for example be a Company Secretary, Administrator, or other appointed or existing 3rd party Company Manager or Law firm.
Debt Token: Tokens that represent private debt to create broader and cheaper access to global pools of capital and for investors to access middle market investment opportunities. E.g. An established business wants to raise capital as a bond to fund expansion or development.
Examples of enhancement concepts and additional programmability:
Where relevant, such an offering could be aimed at a brand’s existing and loyal customer-base to create a loyalty bonding curve between customers who already love the product/service and who want to benefit from its ongoing economic success and will do more to encourage that success as super-affiliates when they also the tokens e.g. hospitality, brands.
Enhanced Rights could be offered for token-holders at different levels e.g. all token-holders get benefits (discount on purchases, priority upgrade/access/reservation, partner products etc.) and if you hold more than X tokens you get super-benefits (which might include a higher return - coupon rate or share of dividends).
We can support the design and issue of a security token or asset-backed token offering working closely with your law firm, financial advisers and company managers/administrators. We will develop the token and associated smart contract and support the set up of the multisig wallets necessary to manage the tokens, however our role will extend beyond this to ensure a coordinated delivery and set up for your token.
In order to help us to evaluate your needs, please contact us using the contact form.
We will work with your corporate finance and legal advisers to define any suitable solution.
Once we understand your needs and learn more about your project and the type of token you want, we can provide you with a cost-effective proposal and scope of work.