With all the optimism surrounding security tokens, it is only proper to understand what the fuss is all about. Will these securities really change and shake up the markets like some pundits are instigating? There is no doubt that the tokens have a great potential in the market. The future especially seems set in the digital world. But before that happens, it is important to analyze the possible uses of the securities.
Let us start with defining securities. In the markets, securities are basically investments made to an entity and which attract a future value. Securities are traded in the market and they are highly regulated. There are initial public offerings made where sales of the securities are made to the public. The digital realm has seen a rise in securities in the form of tokenized securities. These securities are still new and subject to mostly undefined regulatory regimes.
Tokens, on the other hand, are smart contracts on the crypto ledger which can be used as a means of payment or a store of wealth. When pundits talk about tokenized securities, therefore, they are referring to securities which are based on the blockchain. Of course, there are a couple of differences between securities which are on the blockchain versus the traditional securities.
Important issues to note
Considering the similarities between traditional securities and tokenized securities, some people might be misled to think that the markets behind the two operate the same. This is not the case though. Issues like 24/7 trading, fractional ownership, and rapid settlement are not necessarily a result of technological advancement. Instead, the market forces in the securities market are what dictates the kind of processes that take place in the market. In the digital realm, issues like speed and convenience are often cited. Indeed, this is true because technology brings about quick transfer processes. It is not to mean that some securities will not be delayed while other issues surrounding their transaction are resolved.
The nature of the market
Liquidity and market depth are quite important in the securities market. The regulations that are used in the traditional securities market are pretty consistent in the crypto market because of cross-border trading issues. While tokenizing securities and other assets is one way of increasing the depth in the market, there are some issues that cannot be eliminated in the market. Interests, in particular, do not stand to gain much from tokenizing them because of the limitation that comes with private equities.
The essence of tokenized securities
Having understood what they are, it is important to ponder whether tokenized securities are worth the buzz. The nature of any market is constant changes and growth. The securities market and the investment markets as a whole have been evolving for a long time. For many pundits, tokenized securities are a natural evolution to traditional securities.
Blockchain and cryptography have come with many new improvements that are exciting in the financial markets. When analyzed on the surface; simple issues like speed, scope, and capacity make the case for tokenized securities. Decentralization as a whole presents great possibilities which are simply hard to ignore.