In Part One, we introduced the concept of ‘Security Tokens’ and how they differ from ‘Utility Tokens’.
In Part Two, we explore Security Tokens’ major benefits, and their big drawbacks.
BENEFITS OF SECURITY TOKENS
Unlike utility tokens, security tokens actually represent real world value – whether that’s a slice of a company or an asset. Investors don’t need to wait years for ‘adoption’ because the value already exists. This makes them easier to value too and less prone to volatility.
Trading in Security Tokens goes on 24/7 right around the world.
As they are fully regulated, the chances are much lower investors will fall victim to an exit scam. Regulations should also help combat the rampant market manipulation that exists in the crypto market
Floating a company on the stock market is ludicrously difficult and is only really suitable for large companies targeted tens of millions of funding. It requires enormous amounts of very expensive middlemen. Security Tokens by contrast are relatively easily to set up and are affordable for smaller, early stage businesses who need to raise capital quickly.
Listing a business on the Stock Exchange means ongoing compliance work Security Tokens provide greater flexibility in running a business, comparable to a private company.
Compared to shares they don’t require intermediaries like share registries and the admin costs for buying and selling is virtually zero
You can create a security token for a wide range of assets, from real estate to venture capital and even artworks.
Many companies looking to raise funds through an ICO don’t actually offer a service that lends itself to a utility token (despite many amusingly tortured attempts to do so). A security token is often much more suitable as the value of the token is based on the value of the underlying asset or company and not on demand for the platform.
DISADVANTAGES OF SECURITY TOKENS
You can sell utility tokens to pretty much anyone with an internet connection. But there are many more limitations with security tokens in terms of who can invest in them and where and how they can be traded.
The liquidity isn’t as great – though this will change as the market matures.
Compared to utility tokens, it costs a lot more in compliance costs to set up and sell a security token.
They fall under existing security regulations so it’s a lot more complicated to set them up than an ICO.
Despite all the talk about security tokens, they have only been around for a little over two years and there aren’t a lot of them in the market just yet. This means there are uncertainties over how they will perform and what regulatory hurdles they could face in future.