How STO Exchange Works?
Security tokens are here to stay long, and 2018 has already proved to becoming the buildup year for tokenization of securities and assets. New security token exchanges are emerging with passing time. But there are very few regulated STO exchanges owing to the lack of liquidity. Here liquidity indicates how easily and steadily assets or tokens could be purchased and sold on the market.
Here we will understand how STO exchange works and what functionalities enable compliant trading of security tokens. Let’s begin with little about the background of security tokens.
What is security tokens?
It’s just a digital asset complying to securities regulations. It is issued on the blockchain digitally. Since security tokens are definite financial securities, your tokens are backed by something tangible like the shares in a company, assets, profits, real estate or fine art, and crowd-funding backed assets.
Why security tokens?
If you tokenize private securities, it will let you trade assets more smoothly on a secondary market. You will be free from the administrator burdens of traditional securities. If we talk about the existing private security market, it is in the trillions. It is anticipated that the existing liquidity discounts would be as high as 20 to 30%.
Security token also offers advantages like no middle-man, increased inclusivity, rapid execution of deals, and much more.
Partner at Morgan Creek Blockchain Capital and frequent commentator on security tokens Anthony Pompliano stated that,
“Security tokens bring a number of improvements to traditional financial products by removing the middleman from investment transactions (usually some form of a banker). The removal of middlemen leads to lower fees, faster deal execution, free market exposure, larger potential investor base, automated service functions, and lack of financial institution manipulation.”
How Security Token Exchange Work?
At a high level, security token platforms and protocols quite perform in the same way. Essentially in this system companies (issuers) issue security tokens that signify ownership claims in companies. These issuers are enabled to generate whitelists of wallet addresses; generally. These are ethereum wallet addresses of investors who are permitted to purchase ownership stakes in a company. This is how compliance is forced. When these whitelists are set up appropriately, compliance is forced as the issuer only acknowledges qualified investors to the list.
So if someone is not allowed to buy shares in a company because of compliance problems with valid laws, they are not permitted to hold a security token for that company. Issuers can also outsource curation of multiple whitelists to reliable third parties such as AMLKYC suppliers, qualified investor testing services, and exchanges. It might only acknowledge qualified investors to the platform.
From a given company these are whitelists which are qualified to buy security tokens; that contains a liquidity pool of sorts. This pool is nothing but a powerful network that executes secondary trades of that stock. It means everyone is enabled on the whitelist to trade with each other. It is the real power. It’s unlocking liquidity for secondary trading.
If all this happens with just a centralized database, trades become limited, and we don’t have P2P security token trades in trends. E.g., at a coffee shop, a decentralized exchange, OTC desk, or via whatsoever permission list innovation takes place sooner or later that enables everyone to swap these things. But as security tokens are built with Ethereum, anyone is permitted to innovate at the exchange layer. It is because token level limitations are keeping out non-authorized investors.
When it comes to holding of a Security Token Offering (STO), it needs to back by real assets/profits/company revenue. Such tokens fulfill every requisite of the U.S. Securities and Exchange Commission (SEC) that permits it to apply the token sale in the USA legally. The first security token platform Polymath data represents that STO will overcome on the market by the end of 2020 and will be more than $10 trl.
Investors are more inclined towards tokens
The market for the security token and a whole ecosystem is making things very easy in several ways. It aids investors, regulators and entrepreneurs. While purchasing security, investors will have a transparent contractual relationship with the project.
As the product owner, there are some enforceable rights alongside a utility token ICO.
As a bonafide investor, they will usually be sheltered by current legislation and case law (criminal & civil). It is very good for the investors – and in several ways, it is good for entrepreneurs as well because it keeps them more liable and accountable. This is the reason why efforts towards a securities token market may be for the greatest.