Security tokens are a digital representation of all regulated financial tools. These tokens are recorded on a blockchain. To better understand a security token, let’s talk securities.

Securities are things such as trades, notes, shares/stocks, warrants, and debentures, which are all tradeable financial assets. As with stocks, securities are a way to part-own a company without having possession of it. Companies and governments use this method to raise money from investors and their capital markets. Securities usually then allow and offer investors dividends as well as the democratic right to vote on company decisions. Investors will also get some sort of interest rate or share of a company’s profit.

When all of the above is done through a cryptographic token, it is called a security token. This means these tokens pay dividends in other tokens or assets to achieve profits for the holder. To be a security token, the token must be regulated and abide by the rules of the SEC.

ICOs vs STOs

ICOs have been a bit of a grey area over the past year. Regulators like the SEC have been clamping down on ICOs. In November, two ICOs called Airfox and Paragon were ordered to pay a $350,000 fine and to refund all investors who participated in their token sales. This is because they failed to register their ICOs with the SEC. Since then, the two companies have agreed to register the projects and submit periodic reports to the SEC.

The SEC’s co-director of enforcement, Stephanie Avakian, said in a statement: “We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities. These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

Coin Rivet’s CEO Sheba Karamat also recently moderated a panel titled ‘Are ICOs Dead? Long live STOs or what?’, where Laura Kornelija Inamedinova and Jan Baeriswyl discussed their opinions on the matter.

After this clampdown, start-up companies were pushed to launch STOs, as they are compliant with SEC regulation.

For the SEC to judge whether or not a cryptocurrency is a security token, they will employ the ‘Howey Test’, which is a test created by the Supreme Court to determine if cryptocurrencies qualify as investment contracts. If passed, under the Securities Act of 1933 and the Securities Exchange Act 1934, the transactions are classed as securities and are subject to the registration requirements.

Polymath

Polymath is a security token issuance platform. It provides businesses with an easier way of making their financial products to launch security tokens on the blockchain. Therefore, the platform assists businesses in bridging the gap between traditional securities and blockchain-based asset ownership and the investment freedom they provide. Polymath simplifies the legal process of creating and selling security tokens and enforces the SEC regulation.

Polymath does not have its own blockchain. Instead, it operates on the Ethereum blockchain. Its native token is called POLY, an ERC-20 token. Investors are able to pay their verification fee in POLY, and they can also invest their security tokens through POLY tokens. However, developers can earn POLY when they create smart contracts for the STO and token. Polymath also has its own ST-20 token that the company plan to use for their issuers to launch complaint security tokens.

Over the coming years, it will be interesting to see if Polymath can capture the interest of investors and bring them into their ecosystem. We should, as time goes on, be able to see what percentage of the market the project can seize.

Is this the future or not?

STOs offer us many benefits. Issuers gain an advantage of lower transaction fees and the execution speeds are higher. They also provide a wider range of investor deal terms and bases.

Investors have also seen the huge benefits they offer, from the enhanced liquidity potential to the superior asset universe they provide.

Researchers believe that in the next two years, security tokens will have a significant influence on the advancement of the capital markets industry. Although they are still up and coming, their adoption will conclusively enhance the blockchain industry.

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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.