What Is A Security Token & Security Token Offering (STO)?

Traditional real-world assets lack various features such as accessibility, divisibility, and liquidity. For these reasons, these asset classes are unsuitable for short-term trading and have less retail investor participation. 

The buying and selling process involved with illiquid assets like real estate consists of a time-consuming process involving finding a potential buyer or seller within a budget. Then, the buyer or seller needs to go through a lengthy registration process and pay broker fees and other charges. 

Here, security tokens emerge as a smart solution for all these problems with traditional assets. These digital tokens help users reduce the settlement period, increase the liquidity of the assets, and provide improved accessibility.

The involvement of government bodies that follow strict regulatory requirements adds more trust for the token investors. For this reason, the security tokens are expected to achieve a trading volume growth of over $162 trillion by 2030. 

This article breaks down the concept of security tokens and explains what Security Token Offerings (STOs) are.

Security tokens are digital assets that represent the ownership of traditional assets such as stocks, real estate, bonds, and more. These tokens are issued on the blockchain through a process known as tokenization. 

Security tokens help remove friction related to the existing capital market, including high transaction time and fees. Moreover, regulatory requirements must be met to create security tokens. 

Converting traditional assets to digital security tokens saves a lot of time and manual effort. The smart contracts help projects execute codes based on the provided set of instructions and conditions automatically.  

Security tokens have various benefits over traditional securities, including the following.

Investors can buy, sell, or trade their security tokens without bothering about the market timings that existed with traditional markets. 

For example, the trading hours of the world's prominent stock exchanges, the New York Stock Exchange (NYSE) and NASDAQ, are limited between 9:30 a.m. and 4:00 p.m. ET from Monday to Friday.

For security tokens, investors can access the market around the clock. Simply put, users can buy or sell security tokens at midnight, on weekends or holidays.

Security tokens bring global investors under one hood. Therefore, investors who used to own assets that belonged to only their countries can explore other worldwide investment opportunities. 

For example, an investor from a remote Asian village can buy security tokens representing a portion of a residential property in Canada or the USA. As a result, investors now have the freedom to explore tangible assets that had limited investment possibilities previously.

Fractional ownership of assets allows users to own a part of valuable asset classes without paying a high price. 

For example, a tokenized painting by a famous painter can be divided into thousands or millions of tokens, making it affordable for retail investors. 

Fractional ownership is not limited to paintings; it can be applied to other high value assets, including precious metals, real estate, or high-cost equities. Here, investors can allocate their small capital to assets that were too expensive before the introduction of asset tokenization and security tokens.

Assets like stock settlement for U.S. securities take T+1 (trade date plus one day) to transfer securities from the buyer to the seller. For real estate, these settlement processes can take many days or weeks, depending on various market conditions.

However, security tokens offer one of the quickest settlements regarding asset transfer. For example, if you buy a security token, the buyer receives the payment within a few minutes, and you'll have the token details in your crypto wallet.

Expensive and tangible asset classes like real estate and paintings fall under the category of illiquid assets. For this reason, finding a potential buyer during a bad market condition can be tedious and time-consuming.

Security tokens representing real estate and paintings and fractionalization features improve liquidity. As a result, owners of traditionally illiquid assets can now sell their tokens on marketplaces without seeking buyers.

Security tokens allow inventors to own traditional assets without dealing with clearing houses, brokers, or custodians. For example, to buy a digital security token representing a property, the investor doesn't need the service of an agent. 

Eliminating middlemen plays an important role in cost reduction. Now, with security tokens, investors don't need to pay the broker fee, commission, or other service fees for agencies.