Could security tokens representing real-world assets dominate 2023?

The INX Digital company’s Deputy CEO, Itai Avneri 

Representing real-world assets worth hundreds of trillions of dollars, security tokens are beginning to transform the way we own and trade assets. Security tokens are generating a fair amount of interest from Wall Street titans and could emerge as a surprise contender in a year that will be shaped by the regulatory blowback to the monumental chaos of 2022.  

A security token is a token that represents ownership in a physical or digital asset, similar to traditional securities like stocks or bonds. In contrast to traditional securities, security tokens are traded 24/7, 365 days a year on the blockchain, and their value is determined by the underlying asset they represent. Unlike other cryptocurrencies, security tokens are subject to federal securities laws and must comply with regulations governing the sale and trade of securities.  

 

A Secure Path Already in Place 

Regulators are starting to catch up to the innovation taking place in the digital economy. During an insider trading case involving an ex-Coinbase employee, the Securities and Exchange Commission (SEC), took the opportunity to formally declare nine digital tokens as “securities.” Later in the year, the SEC determined that FTX's exchange token is a security, yet of all the multiple exchange tokens, only the INX token is actually fully registered as a security with the SEC. By setting a precedent through the FTX ruling, the SEC decision could affect many exchange tokens and have widespread implications for the cryptocurrency industry as a whole. Cleary, regulatory developments make security tokens inevitable.  

Security Tokens are Winning Over the Skeptics 

Security token offerings (STOs), regulated token offerings through which companies can raise money, were popular back in 2018 but have since taken a back seat to the NFTs and DeFi as ‘killer apps’ of the blockchain. Five years later, a resurgent security token market is even winning over institutions that have historically been skeptical about cryptocurrencies, such as the Monetary Authority of Singapore (MAS) and JPMorgan. In 2017, MAS released a statement cautioning the public about the risks of investing in cryptocurrencies, citing their lack of regulation and potential for money laundering and terrorist financing. However, more recently, MAS has taken a more favorable stance towards digital assets, including security tokens. Under its Project Guardian initiative, the authority has partnered with JPMorgan to develop a DeFi app for the trade of tokenized currencies, indicating a belief in the potential of these assets to revolutionize finance. JPMorgan, which once called Bitcoin a "fraud," has also grown confident in security tokens. The bank's use of a Defi app for the trade of tokenized currencies demonstrates a belief in the potential of these assets to shape the future of finance. It seems that both MAS and JPMorgan, as well as other multiple industry giants such as Fidelity, BlackRock and many more have publicly recognized the potential of security tokens to revolutionize the financial industry and are taking steps to incorporate them into their operations.  

Warning: Meteoric Rise Ahead 

Tokenization has shown that it can unleash tremendous value in a short period of time.  

Take DeFi, for example, which grew from zero to hundreds of billions in just a couple of years. Yet, the entire span of the crypto market pales in comparison to the market value of the real-world assets that have yet to be tokenized.  The global bond market alone is worth $119 trillion and is starting to make its way on-chain. In October 2022, the Israeli Ministry of Finance announced its plans to issue a tokenized bond and thereby join Australia and the European Investment Bank, which tokenized $110 million and 100 euros worth of bonds, respectively. On the corporate side, UBS recently issued a digital bond worth 375 million Swiss Francs that will trade on both a blockchain-based exchange and the SIX Swiss Exchange.  

When considering the potential of security tokens, it’s no surprise that the Boston Consulting Group estimates the security token market will reach $16 trillion by 2030. The endorsement of security tokens by both the crypto community and traditional financial institutions points to a bright future for security tokens. As the market for security tokens continues to grow and rapidly expand across multiple blockchains, we should all learn more about this game-changing asset class. A “security token bible” was just released to provide the required clarity.  

The INX Way is an informative guide written by the first company to embark on this path and the first to register a security token with the SEC. INX’s leadership and industry experts wrote this guidebook to help educate market participants, legal professionals, issuers, and investors about the new real-world assets that undoubtedly will dominate our evolving economy.  

We should all arm ourselves with the information that leads us to new safe investment opportunities and new ways to achieve your goals. 

This post is commissioned by INX and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.


© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.