Security tokens are digital representations of value that can be used to store a portion of any asset, including real estate or company stock. It is because of their digital nature that security tokens can represent not only ownership of traditional assets such as stocks or publicly traded bonds, but also traditionally illiquid assets such as private placements, real estate or art. Tokenization also increases the liquidity of traditionally illiquid and indivisible assets such as real estate. Security tokens also allow investors to obtain fractional ownership of the token’s underlying assets, which helps reduce minimum investment and increase market liquidity.
Tokenization also allows issuers to take a single asset, such as a gold bar, and build a fractional ownership model by creating multiple tokens that are linked to a single underlying asset. Security tokenization opens up liquidity to asset owners, giving them access to a wider range of potential investors. Placing existing assets in a security token investment envelope can be beneficial as tokens have high liquidity, transferability, and security of ownership. To create funding and market liquidity, security tokens must establish the underlying protocols for funding and trading assets.
In short, for security tokens to become liquid assets, infrastructure and demand are needed. In short, security token markets need issuers, traders and investors to create liquidity that will attract more issuers, traders and investors. Unlike other financial asset classes, security token liquidity is an infrastructure building exercise, not a financial design process. Once the infrastructure is in place, it becomes possible to liquidate illiquid assets.
According to Invector Labs CEO Jesus Rodriguez, the security ecosystem should also include P2P-Swap trading protocols, debt tokens, custody, futures, and other derivatives as the cornerstone to unlock liquidity in security tokens. In the future, security tokens representing different types of assets will increasingly occupy the same blockchain network simultaneously, allowing investors to integrate and interact with all existing assets through a unified, data-rich interface. To better understand the unique benefits and regulatory challenges of blockchain security tokens, let’s take a closer look at how these digital assets are changing the way value is transferred.
Tokenization and asset trading bring significant benefits to issuers, broker-dealers and investors: access to more capital, greater liquidity, faster registration, more efficient processes, real-time settlement and simplified compliance. Polymath technology seamlessly simplifies the entire tokenization process, from creating security tokens to managing assets that can be traded on secondary markets. The benefits of the securities token market for both issuers (lower cost of capital and maintenance of capital plus greater flexibility in the instruments that can be issued) and investors (access to asset classes previously unattainable even for modest savers) are clear.
Breakouts are especially valuable for high-value assets because tokenization of securities expands the class of potential buyers, including small investors who are looking for only a partial stake in an asset. Tokenization is simply the process of creating a digital right or unit of property, like a Polymesh blockchain security token, in one of the financial and real assets in a blockchain or distributed ledger system.