Why You Should Pay Attention to Security Token as a Real Estate Investor in 21st Century?Published by
Despite the fact that the world has become more digital, many financial markets continue to operate in an antiquated manner for the purposes of managing, purchasing, and selling assets. Specifically, this is true in the commercial real estate markets, where the investment sector is very illiquid and unavailable to the majority of the population. Despite the fact that this indicates an inefficient market, the manually demanding infrastructure also gives an opportunity for "technological intervention."
Briefly stated, the real estate investment market could benefit from the use of security token offerings (STOs), which issue real estate assets on a distributed ledger (also known as tokenization). This would automate middleman processes, increase liquidity, lower the capital requirements for investment, and improve transparency.
Throughout this post, we will assist you in understanding why you should pay attention to STO as a real estate investor and how to do so effectively.
What is a Security Token Offering (STO)?
To have a better understanding of STOs and why we need them, we must first understand why initial coin offerings (ICOs) were considered as a stain on the blockchain industry's general reputation.
From 2016 to 2018, initial coin offerings (ICOs) were in high demand, and investors were willing to put their money into this new type of funding. In the first quarter of 2018, approximately $6.3 billion in funds was committed to initial coin offerings (ICOs). Initially, it was anticipated that the value of these assets would increase over time. The bubble, on the other hand, burst in Q4 of 2018, when the "market capitalization" of all cryptocurrencies plummeted by more than $750 billion. The Securities and Exchange Commission (SEC) of the United States was still on the fence about enacting regulations surrounding token sales.
Within a short period of time, regulatory authorities started issuing statements on the subject of compliance. The most prominent came from SEC Chairman Jay Clayton, who deemed all initial coin offerings (ICOs) to be securities. The Swiss Financial Markets Authority (FINMA) also published recommendations that categorized tokens as securities under current regulations. These and other declarations on initial coin offerings (ICOs) prompted many blockchain creators to complain, claiming that their companies were offering utility tokens rather than securities. Entrepreneurs and investors have shied away from the initial coin offering (ICO) sector because of the regulatory uncertainty surrounding it.
Security Token Offerings were created in response to regulators' need for token offerings to stay compliant with current securities laws and regulations. STOs are very similar to initial coin offerings (ICOs), but they are required to comply with securities laws in the jurisdiction in which the token is being offered for investment. Because STOs are in compliance with applicable laws and regulations, they impose new legal duties on companies that issue equity in the firm.
What are the use cases of Security Token?
The ownership of an equity token is comparable to that of a conventional stock, with the exception of the way in which ownership is documented and transferred. Tradition dictates that the monitoring of shares be done in a database, with ownership of shares being printed and confirmed on paper certificates to prove ownership. Instead, an equity token is recorded on an immutable ledger kept up-to-date by tens, hundreds, or sometimes even thousands of computers networked worldwide. Holders of equity tokens are entitled to a percentage of the company's profits as well as the ability to vote.
Tokens representing ownership of assets like as real estate, art, carbon credits, or commodities are used to symbolize ownership of these items. Because blockchain is safe, irreversible, and transparent, it allows for the creation of a trustworthy record of transactions; it also lowers fraud and speeds up settlement times, making it an excellent match for the commodities trading industry. Asset-backed tokens are digital assets with characteristics similar to any commodity, such as gold, silver, and oil, which, in turn, bring value to these traded tokens.
Benefits of Security Token
Unlocking Liquidity for Asset Owners
STOs provide a chance for asset owners to make their illiquid physical and intangible assets tradeable, hence enhancing their liquidity. Paintings, antiques, and real estate have traditionally been considered illiquid, and they are often exchanged by auction or through an agency.
Without a security token, it would be difficult to fractionalize ownership among different investors, and the purchase and sale transaction (e.g., exit price, timing of sale) would not be complete until consensus was reached among all owners at the same time, which would be impossible without digitalization.
Through the use of STOs, issuers may be able to generate liquidity without having to sell the whole asset. Considering the unique characteristics of security tokens, it is theoretically possible to issue an endless number of tokens, resulting in the assets being held by a potentially enormous number of investors. Asset owners may take use of the divisibility of STOs to raise cash from a variety of sources while maintaining control over the bulk of the asset.
Lower Barrier of Investment for Investors
STOs have the potential to provide investors, particularly accredited professional investors, with a significantly greater variety of assets. As previously stated, assets such as collectibles, real estate, and intellectual property are now able to be tokenized and turned into fractional investments via the use of blockchain technology.
By acquiring tokens that represent a tiny fraction of the artwork or antique, investors may reduce the risk associated with their investment. To put it another way, STOs provide a new avenue for portfolio diversification, investing, trading, and even hedging by providing an alternative investment vehicle.
Protection of the investor
However, it is important to note that STOs, like any other financial product or structure, are not without risk.
Even if the danger of fraud is lessened, it continues to exist despite the increased regulatory protection and remedies in place. The hype cycle is unquestionably still going on. Therefore, it is critical that the existing investor protection criteria that apply to traditional securities be extended to the issue of security tokens as well as the secondary market trading of security tokens.
The advent of security tokens is not limited to only liquidity and income distribution frameworks, but also includes other applications. Security tokens, on the other hand, open the door to a plethora of investment opportunities. The secondary market provides an opportunity for small investors in particular security tokens to liquidate either the dividend portion of their complete ownership or a small piece of their stake.
Therefore, security tokens are here to stay, and there will surely be more security tokens introduced in the near future. As blockchain technology strives to transform the financial sector, the security token market (STO) is one to keep an eye on in the next weeks and months.
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