Why Securities Tokens Might Be the Next Big Thing in Crypto
If you consider yourself to be a seasoned Progressive Investor, there’s a chance you might have already lived through the Bitcoin mania of 2017, the initial coin offering boom that followed, the beginnings of last year’s DeFi hype, and the NFT craze that you and I are living through right now.
You might also be aware that investing in cryptocurrency is all about focusing on what’s coming next. As it turns out, securities tokens might just it.
There are many reasons for this. The broader and most important reason by far is the same reason that the respected grandfather of them all, Bitcoin, exists in the first place.
More than 31% of the world still doesn’t have access to a bank account. If those people lived in Canada, it would be very hard for you to own a home, invest in stocks, run a business, or do any of the things we all take for granted on this side of the ocean.
In developing countries, it means not being able to participate in financial markets at all, and also not being able to run businesses. Except that in those countries, millions and millions of people are in the business of agriculture. They grow their food and live off the land.
If they can’t finance that, they don’t eat. There is much more at stake for someone in that situation than a Canadian freelance crypto writer like myself for example.
In other Progressive Investor posts, I’ve covered many different opportunities to earn a profit like DeFi, NFTs, and mining (among other topics).
This post is going to focus on securities tokens and their place in the world of crypto derivatives and synthetic assets.
What Are Securities Tokens?
To understand what securities tokens are, you need to know what a security is. No, I’m not talking about bodyguards and mall cops here. I’m talking about investments.
In a broader sense, anything you can pour capital into and reasonably expect to profit from is considered a security. Real estate, stocks, and bonds are all securities.
What is a securities token then? It is simply a tokenized representation of a security.
A Quick Example of a Securities Token
Let’s pretend that I decide to launch the Jack Choros Crypto Content Company. I’ve decided to go way beyond my work with Netcoins and build the biggest freelance writing empire in the world. I want to issue shares of my company to the public, but instead of giving you actual shares, I give you a token. You can hold the token, trade it, or turn it in for a profit.
That’s the basics of a securities token. Why would anybody want to issue a securities token when they could just give you shares and register on the stock market?
There are two reasons for this. One solves a legal issue and the other is a matter of practicality.
Allow me to put this into context using initial coin offerings.
The Initial Coin Offering Bonanza in 2017
The spring and summer of 2017 made early adopters of initial coin offerings incredibly rich, incredibly quickly. The Securities Exchange Commission in the United States and the Canadian Securities Administrators (including all provincial securities commissions) clamped down on that equally fast.
The answer to that is an easy one. While many people got rich off of initial coin offerings, many others lost money by investing in projects that never completed their roadmaps and didn’t turn a profit. Both institutional and small-time retail investors got burned badly. As much as you may not like regulation in the crypto world, governments do sometimes have to protect people from themselves and each other. Enter STOs.
Securities Token Offerings Provide More Protection
The SEC took the lead in investigating initial coin offerings that ended up being a bust for investors and decided that such fundraising initiatives could still occur in the crypto world as long as they were properly deemed offerings of securities rather than ICOs.
This laid the groundwork for more rules being put in place. The most important rule perhaps is that such offerings should only be made available to accredited investors. To be an accredited investor in America, you need a net worth of at least $1 million for an annual income of at least $200,000 in back-to-back years.
In Canada, you need to be worth more than $5 million or have a pre-tax income of $200,000 in back-to-back years.
These rules are not so good if you don’t have that kind of money, but they still allow for new projects to be launched. They also indirectly helped create the concept of IDOs, initial decentralized offerings, where anybody can participate through crypto launchpads.
Securities Tokens and Access to Financial Markets
Now that you understand a bit about how new regulations instituted by both Canadian and American regulators (as well as regulatory bodies in other parts of the world) have impacted and shaped the legal considerations of fundraising using cryptocurrency offerings, let’s get practical.
Beyond keeping things legal, practicality is the reason securities tokens exist. Remember the 31% of people without a bank account I talked about earlier?
The broader mission of cryptocurrency is to give everyone access to financial markets. Securities tokens can do just that.
They also give token holders a way to profit from cash flow and business dealings in a way that NFTs and other assets don’t.
A Quick Example of How a Securities Token Can Help You Profit
Imagine that the Toronto Raptors decided to offer shares of the team to the public that fans could hold to make a profit off of the club’s business operations and the revenue that comes along with it.
Canadian fans are hungry to get back to ScotiaBank arena and watch games post-coronavirus, so you figure it’s a great investment.
You tried making money off of NFTs through NBA TopShot, but the market cooled off considerably and you couldn’t find fans that were willing to pay more than what you paid for your TopShot moments.
Now through owning a securities token issued by the Toronto Raptors, you get to stay connected to basketball, but you’re getting a cut of real-world revenues, not just looking for a collector to cash you out of your collectibles.
In this way, securities tokens have the potential to be both more profitable and more liquid than collectible NFTs (many of which will fail over time). You can still be connected to crypto and earn a profit doing it, but your market is much bigger. It’s also much easier to get access to the opportunity on your own. No broker necessary.
Securities Token Projects to Watch
Nothing in this section is investing advice. I’m only giving you a broader overview of a few securities token projects to monitor so that you can study them and develop a deeper understanding of what may happen in the near and distant future regarding the tokenization of securities. Please do your own research.
Polymath is a project that aims to launch an ecosystem allowing institutional players to tokenize all kinds of securities and assets. It’s a project that’s been in development for many years. The mainnet is scheduled to launch in the third fiscal quarter of this year.
UMA stands for Universal Market Access. The project provides you with the opportunity to create synthetic assets on Ethereum. It aims to eliminate several barriers to entry that you would normally find in traditional finance (just like any other DeFi project). If you want to invest in securities within the traditional financial world, you have to do the following:
- Get a brokerage account.
- Complete KYC and AML.
- Answer questions about your risk tolerance and be deemed suitable for your desired investment by a financial advisor or third-party.
- Provide a fair margin/amount of liquidity to the broker to access certain kinds of investments.
- Find a broker you can trust.
- Pay fees to the brokerage and financial advisors to help you do all of this.
UMA aims to eliminate all that using smart contracts. UMA:
- Ensures that all counterparties have public addresses.
- Takes care of margin requirements using smart contracts.
- Allows you to establish economic terms for calculating value.
- Enables the ability to use oracles to store and validate off-chain information.
Synthetix Network allows anyone staking SNX tokens to the network to mint synthetic assets that represent an underlying asset. Synthetic assets can represent cryptocurrencies, commodities like gold and silver, and even major indices like Japan’s Nikkei exchange. Synthetic tokens like sBTC, sAG (for silver) and sNikkei already exist.
No need to call your broker to access the current value or profit potential of any of these assets.
How to Buy Securities Tokens in Canada
Most cryptocurrency exchanges in Canada don’t sell securities tokens directly. That doesn’t mean that you can’t register for a free account at Netcoins, buy some Bitcoin or Ethereum, and then acquire your securities tokens of choice from there.
If you’ve been studying the crypto investing market for a while now and you think that securities tokens might be the next opportunity to 1,000x your portfolio, open your account today and get in on the next big wave of profits.
Earning a profit is an opportunity that should be accessible to everyone regardless of where they live or how much money they have.
Securities tokens are out to prove just that.
Writer, content marketing at Netcoins.