Blockchain technology has been disrupting various industries, and the finance sector is no exception.
With its decentralized, secure, and transparent nature, blockchain technology has paved the way for innovative investment products. One such product is an investment product that issues securities on a blockchain. In this article, we will explore what this new product is, how it works, and what makes it unique.
What are securities?
Securities are financial instruments that represent ownership or rights in a company or government entity. Examples of securities include stocks, bonds, mutual funds, and real estate investment trusts (REITs). Securities are bought and sold on public exchanges, and their value is determined by market demand.
What is a blockchain?
A blockchain is a decentralized, distributed ledger that records transactions in a secure and transparent manner. Blockchains use cryptography to ensure the integrity of the data stored on them, making it virtually impossible to alter or delete information. The most well-known example of a blockchain is Bitcoin, which is a digital currency that uses blockchain technology to facilitate peer-to-peer transactions.
The new investment product that issues securities on a blockchain
A security token is a digital asset that represents ownership in a company, fund, or other financial instrument. Security tokens are issued on a blockchain and can be traded on public exchanges like traditional securities. However, unlike traditional securities, security tokens are not regulated by securities regulators, making them more flexible and accessible to investors.
How does the new investment product work?
The new investment product works by issuing digital tokens that represent ownership in a company or fund. These tokens are stored on a blockchain, which ensures their security and transparency. Investors can buy and sell these tokens on public exchanges, similar to traditional securities. The value of the tokens is determined by market demand, just like traditional securities.
What makes this new investment product unique?
Decentralization: Since the blockchain is decentralized, there is no need for intermediaries like brokers or exchanges to facilitate trades. This reduces costs and increases efficiency.
Transparency: All transactions on a blockchain are transparent and publicly visible, which increases trust and accountability.
Flexibility: Security tokens can be traded on public exchanges like traditional securities, but they are not regulated by securities regulators, making them more flexible and accessible to investors.
Accessibility: Since security tokens can be traded on public exchanges, they are accessible to anyone with an internet connection, regardless of their location or financial status.
Real-life examples of successful security token issuances
There have been several successful security token issuances in recent years. One example is the DAO (Decentralized Autonomous Organization), which raised over $150 million in Ether, a cryptocurrency, in 2016. The DAO was built on the Ethereum blockchain and used smart contracts to manage its operations. However, the DAO was hacked, and the funds were stolen. The incident highlighted the risks associated with security tokens, but it also paved the way for future successful issuances.
Another example is the tZERO exchange, which was launched in 2019 and began trading security tokens in 2020. tZERO is a regulated alternative trading system (ATS) that allows companies to issue and trade security tokens compliant with securities regulations. The exchange has partnered with several well-known companies, including Square and Circle, to list their security tokens.
How does the new investment product compare to traditional investments?
The new investment product compares favorably to traditional investments in several ways:
- Decentralization: Unlike traditional investments, which are facilitated by intermediaries like brokers and exchanges, security tokens can be traded directly on a blockchain, reducing costs and increasing efficiency.