Security Token Offering 101 — Security Tokens. What Are the Different Possibilities of Value Representation?

Possibility N1: The Security Token Represents A Security

The most obvious value representation of a security token is when it is representing another (non-tokenized) security. This happens for instance when the security token is representing a company share certificate which, for instance, grants profit participation rights to the owner.

Possibility N2: The Security Token Itself Is A Security

In security tokenization, it becomes really interesting when the security token itself is a security, and not merely a representation of it. This is the case when a security token represents tokenholder rights related to an underlying asset such as real estate or art for instance, which by itself are not securities.

Possibility N3: The Security Token Represents Actual Ownership

In the above paragraphs we speak of value representation by security tokens, but we do not speak about ownership. That is right. Currently, security tokens do not represent ownership, they represent rights to something.

And What About Possibility N4?

Just as it is the case with equity tokenholders, an asset tokenholder (possibility N2) is currently not the owner of his/her fraction of the asset. He/she solely owns the token, which represents some kind of right (e.g. life rent) regarding the asset. Furthermore, security tokens are issued via a legal entity, which is called the “token issuing company”. The token issuing company owns the (tokenized) asset, and as such can issue tokens granting token investors a right with respect to the asset.

To Conclude

Given the above explanation, this does not mean that asset and equity tokenizations are not taking place, on the contrary. Over 300 STO’s (conservative estimate) are expected to see the light in 2021. Most of them will be executed with profit participation rights, but without direct voting rights, which is in many cases more than sufficient for the token investors, and not at all a showstopper.

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2140 Consulting

2140 Consulting

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Security Token Offering (STO) advisory. Located in Benelux.