14 Apr What Are Security Tokens & How Do They Work?
Tokenised securities, better known as security tokens, are regulated and compliant investment assets in the form of a cryptocurrency token. They have all the advantages of a digital asset and bring traditional securities offerings into the information age.
Security Tokens: A Brief Overview
A security is simply a financial asset which can be traded. There’s generally 3 main kinds of securities, Equity, Debt, and Derivatives. Equity is a portion of ownership in a business like owning Apple stock, Debt securities are assets like bonds or notes, and Derivatives can be financial instruments like futures or options. On Bitfinex Securities, we offer Equity, Debt and Funds (including REITs) in tokenised form.
Security tokens are tokenised digital assets which represent one of the 3 types of securities described above, Equity, Debt, or Derivatives. Security tokens also inherently have all the characteristics of a cryptocurrency which grants them quite a few benefits over traditional securities.
Security tokens can offer the following advantages:
- Instant trade settlement and finality.
- Blockchain-verified withdrawals and deposits.
- The ability to manage your own wallet with low friction / high freedom of use. Investors are able to withdraw assets from the platform, participate in P2P trading and self-custody assets
- Markets which trade 24/7/365.
- A regulated and compliant way to raise capital globally with clearly defined issuer obligations and investor rights.
- Access to truly global liquidity.
- Faster time to market and cost of issuance relative to traditional IPOs or GDRs, making access to global capital markets available to a broader range of issuers
Security tokens represent a technological leap forward for conventional securities offerings which haven’t changed much since the advent of the Howey test around 1946. They possess the disruptive qualities of crypto assets, the network security of the blockchain, and the global reach, accessibility, and transaction speed of the internet.
How Do Security Tokens Work?
Security tokens work much like other cryptocurrencies and digital assets. In general, they are created or issued by a smart contract and exist on a blockchain network. Blockchains are shared public ledgers which can be independently verified by every network participant.
Security tokens have a public transaction history that can be verified and they can be traded peer to peer by participants, without the need for an intermediary.
Security tokens can take different forms depending on the blockchain network it is issued on. On a blockchain like Ethereum that might be an ERC-20 token, on Solana an SPL token, etc. There are many variations of blockchains with their own tokenization frameworks, but generally the end results are the same, a token which represents a security offering is created, which then can be traded on the network.
On Bitfinex Securities, our full service securities platform for issuing and trading tokenised securities, our first listing has been an asset that is issued as Transfer Restricted Assets on Blockstream’s Liquid Network, a Bitcoin sidechain with additional features. Our second listing will also be issued on Liquid Network when it launches.
Transfer Restricted Assets on Liquid allow issuers the ability to meet KYC/AML/Regulatory obligations while still offering investors high freedom of use. By restricting transactions to whitelisted addresses users are able to self-custody their assets, move their assets off platform and to execute p2p trades.
Just like traditional securities, holding a security token can incur profits or losses, as the tokens value fluctuates with trading, and security tokens may entitle the holder to dividend payments, interest, or voting, governance, or residual rights.
Security Token Regulation and Market
In the crypto market cycle from 2016-2017/18, the blockchain space was awash in unregulated token offerings known as Initial Coin Offerings (ICOs) which lowered the barrier to entry for raising capital through token sales to finance blockchain projects and startups, and allowed anyone to participate.
ICOs were wildly successful, but because of a lack of regulatory oversight, many bad actors also entered the ICO space to take advantage of the lack of clearly defined issuer obligations. Eventually, regulators stepped in, and started determining if token offerings were securities by applying the Howey test.
Some jurisdictions were looser than others as far as the regulations they applied to blockchain capital raises, but in the largest and most influential regulatory regimes, ICOs fell under the jurisdiction of securities regulators, who began to apply existing securities regulations to token offerings.
It was these circumstances that birthed security tokens. Security tokens are fully regulated under existing securities frameworks, and security token offerings are compliant with securities laws.
In many cases, they’re only available to qualified investors, similar to traditional securities. In Security token offerings, it is the regulators or governing bodies that apply oversight to exactly how tokens should be issued, offered, managed, and exchanged.
Bitfinex Securities – Full Service Tokenized Securities Platform
Security tokens offer a new spin on traditional securities offerings, and now that regulators in the world’s most influential jurisdictions have provided a clear path towards compliance, Bitfinex has seized the opportunity to provide a world class Securities token platform, known as Bitfinex Securities.
Bitfinex Securities offers best-in-class trading technology and industry leading liquidity to improve market efficiency and reduce costs associated with raising capital and trading investment products. Bitfinex Securities offers a full suite of services for issuing, trading, and investing in tokenised securities, tokenised debt, and tokenised funds.
The Bitfinex Securities listing team works hand in hand with companies to provide an “all-in-one” solution for businesses looking to raise capital, expand, or build and scale their operations. Raising capital with Bitfinex Securities involves a seamless onboarding experience which is fully compliant with all applicable regulatory requirements, including strong KYC and AML checks.
Bitfinex Securities provides primary and secondary market peer-to-peer securities trading, for Issuers and Members, 24/7/365. Bitfinex Securities offers a more resilient, cost-effective, and efficient way for traders and companies underserved by traditional capital markets to gain access to funding and to issue and trade tokenized securities, in the highest liquidity markets, worldwide.
Bitfinex Securities is registered in the Astana International Financial Centre (AFIC), a financial hub established by the government of Kazakhstan to attract foreign investment and to improve access of domestic companies to global capital markets.
Bitfinex Securities is regulated by the Astana Financial Services Authority (AFSA), the independent regulator of the AIFC, which is tasked with maintaining the safety and robustness of the AIFC financial system and ensuring that financial markets in the AIFC are fair, efficient, and transparent.