The Distributed 2018: Enterprise Blockchain Conference, which took place in San Francisco in July 2018, featured a panel of tokenized securities experts. The speakers provided fruitful discussion which ranged from the active progress they’ve seen throughout the recent evolution of tokenized securities, to challenges that they continue to face.
Benefits of Securities Tokens
Josh Stein, the CEO of Harbor, emphasized numerous benefits that securities tokens will bring to traditional private securities, which include things like shares in a private company, limited partner private equity, etc. The benefits seem to center around one major factor, which is liquidity, and two additional factors which entail interoperability and security.
Tokenized securities feature a level of liquidity that traditional trading markets have never experienced. When you put an asset in token form, you immediately have an open-source and electronic representation of that physical asset. In the world of cryptocurrencies, you can trade this token on exchanges which feature global 24/7 trading— a characteristic that is unique to the realm of cryptocurrencies and is nowhere to be seen in traditional finance.
Such liquidity is especially the case with real-estate, says Stein.
Tokenization unlocks value because of its liquidity- its easy to transfer ownership. Where you want to lock up the capital but not the investor, where you’re sensitive to the cost of capital but relatively indifferent to the identity of the investor, that’s a great use-case early on for tokenization. Real estate is that industry. They’re very sensitive to the cost of capital.
Interoperability and Security
To take things a step further, securities tokens exhibit a high degree of interoperability. This means that whatever asset you put in token form, you can trade for many other things— such as other securities tokens, utility tokens, or digital currencies. Hence, there is no restriction to trade a security token solely for other security tokens. Additionally, the protective security seen in the tokenization of securities is much different than that of traditional assets. For one, if you own a token, there is no centralized server which maintains ownership. If such were the case, hacking or malfunctioning servers would result in a lack of access to tokens.
As Stein himself pointed out, securities tokens offer even more security than traditional cryptocurrencies. For example, if you’re the victim of a hack which steals your Bitcoin, your asset is lost. It’s simply gone. And the chances of you getting it back are miniscule, if even existent at all. But when it comes to a hack which results in the loss of stolen securities tokens, the asset isn’t gone. The only result is a ledger which fails to coincide with its rightful owner(s).
However, the securities sector features strict compliance:
a company has to always know […] the true identities of the people that own those securities, and they have to have the ability to assign ownership”, said Stein. If a court orders a company to transfer certain assets, the company must have the power to do that. And this is exactly why, Stein added, “anybody that’s hacking security tokens to try and steal them, is committing the imperfect crime, because they’ve left a perfect record of what they have, and someone’s about to take it back, and then send them to jail.
Do you agree with Stein’s input on the benefits of tokenized securities? How will the push for further regulation— yet a balance for decentralization— play out in the future? Let us know what you think below!
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.