The buzz around digital securities (or security tokens) has never been higher in the financial industry, and neither has the confusion and misinformation been more evident.
With Facebook’s recent announcement to create a cryptocurrency, a blockchain, and also do a security token offering (STO) all at the same time it’s more important than ever to clarify what a digital security is, and what it is not.
The issue for those of us in the digital securities industry is that the lack of knowledge and understanding stifles needed progress and breeds unwarranted confusion and distrust. To truly capitalize on the promise of digital securities the industry players and the public need a clear understanding of what they are and how they’re poised to dramatically change the securities markets for the betterment of all players involved.
First, let’s establish some clarity around nomenclature for “digital securities.” Depending on their underlying technology, they are also referred to as “digitally formatted securities,” or “security tokens.” One reason for the variations is linked to our industry’s effort to distinguish itself from the unregulated realities of the cryptocurrency and ICO world.
Cryptocurrencies exploded on the scene several years ago as an entirely new asset class leading to a wave of unregulated crypto offerings and ultimately resulting in a crackdown from the Securities and Exchange Commission.
Traditional securities have been around for centuries in an analog form. Digital securities are simply traditional securities that have been digitally formatted so they can be issued, traded, and tracked much more efficiently. Digital securities formatted using blockchain technology are called security tokens or tokenized digital securities.
And yes, blockchain technology facilitates the issuance, management, and trading of both cryptocurrency and tokenized digital securities, but the similarities end there.
Market participants don’t have to be crypto-savvy to issue, buy or sell digital securities, and they also shouldn’t expect the boom (and ensuing bust) the crypto market experienced. Because these securities are fully regulated by the SEC, the growth of the provider ecosystem and market volume will be more deliberate and ultimately, more stable.
In essence, digital securities are merely a format update to a massive, long-established, but traditionally inefficient segment of the regulated securities market. Digital securities typically represent an interest in private and non-listed securities like real estate, venture capital and private equity, but they are not a new asset class, and they are most definitely not cryptocurrencies.
The move from legacy private securities to digital securities does not change the outcome of the transaction, but how easily it takes place. Digital securities bring automation and blockchain-based efficiencies to a marketplace that’s been virtually untouched by innovation.
While current cryptocurrency discourse has created confusion about the role of digital securities, it’s time to shift the conversation.
Instead of being seen as a novelty or the next iteration of crypto offerings, digital securities should be seen as the natural next step in the evolution of private and non-listed securities —finally guiding alternative assets into the digital age.
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