Over the years, the adoption of security token has been static due to challenges like compliance, governance, identity, confidentiality, immature market, unadvanced technological systems, e.t.c However, in spite of these odds, analysts have predicted that considering the increased level of growth in the market and considering other factors, 2021 is a likely boom for security tokens.
The beautiful thing about this technology (security token) is its importance and likely impact to the blockchain industry. One of which is it’s denomination of fractional ownership of a real asset and its ability to provide a bridge between the traditional finance sector and blockchain sector and still benefit both equally.
Security Tokens are Digital Securities
Security tokens (or digital securities, as they’re sometimes called) are digital representations of an asset such as equity, fixed income, real estate, investment fund shares, commodities and structured products that are traded and held on a blockchain or a distributed ledger.
These assets are termed ‘securities’ because they are regulated with governing bodies across the world dictating their issuance, management, and exchange.
They allow for many traditionally cumbersome and highly-manual processes to be automated hence providing a platform of truth and transparency that all parties can depend on.
In essence, security tokens combine the speed and ease of blockchain with the strong legal protection of traditional securities. They are created through asset tokenization and asset origination.
DeFi & Security Token
So far, DeFi continues to play an important role in the evolution of the financial sector for many reasons. For one, DeFi expands the functionality and reach of money. There is huge potential for the DeFi sector to expand the global economy. Consequently, analysts see this sector as one of the most important currently under development and making progress in the crypto space.
According to Ricky Dodds, Strategy and Communications Leader at ICON, the rise of DeFi is a major factor why security tokens are poised to make a major comeback in 2021 and beyond. He notes that there is obviously no need to rely on centralized exchanges as a secondary market as we did in prior years. Companies wishing to tokenize an asset can do so with a secondary market much more easily with decentralized exchanges, providing efficient liquidity to investors.
Advanced Technological Infrastructure Stirs It Up Too
Blockchain technology has evolved greatly since the introduction of Bitcoin in 2008, Today, innovators in various fields are realizing the benefits of this technology with other technologies leveraging on the growth of this technology.
A clear picture is seen in the period of 2018 where security tokens were the hottest topic in blockchain, but despite many efforts, they never truly took off at the time. Dodds believes that this was because three things were lacking: technology infrastructure, legal understanding, and investor/market sentiment.
The issue of technological advancement is one that should be critically taken into consideration. Today, blockchain technology has made massive strides, as we can see just by witnessing the proliferation of DeFi products and platforms. Other factors that are left to stir or speed up the adoption are being put in place such as an improved legal framework and a more matured market.
Why So Certain?
Looking at the three issues highlighted to be the major problem connected to the rise of security tokens, we see that so far, the security token landscape is taking steps in the right direction to overcome it’s hurdles.
Dodds pointed that the legal and regulatory landscape around cryptocurrency, while not perfect, is much more clear, making it easier for people to understand how tokens can represent equity and real-world assets. Also, the markets have matured greatly as new and traditional market participants are collaborating more often and institutions across the world are realising the opportunities security tokens present.
“Moreso, since cryptocurrency investors are more interested in long-term growth than making a quick buck, says Dodds. “They are more likely to understand the advantages of asset-backed tokens vs. utility tokens that helped drive the last bull run”.
He concludes that ICON is working on a way for anyone to invest in tokenized real estate in 2021. There are countless use cases for security tokens, and the industry hasn’t yet scratched the surface. We expect many other projects to enter the security token space in 2021 and beyond, driven by new advances in blockchain technology infrastructure, improved legal frameworks, and market maturation.
Duru Joselyn is a content creator, writer, self development coach and news analyst. She specifically enjoys writing on anything pertaining to cryptocurrency and the blockchain industry. Joselyn is a fun loving Nigerian who not only has a flair for giving information updates; she also enjoys a variety of outdoor activities especially traveling and photography.