SECURITY TOKENS EXPLAINED
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Security Tokens Are Blockchain Based Securities
A Token Is A Digital Symbol Of Ownership
The potential to digitize (tokenize) ownership of almost any asset will enable new mechanisms for democratizing access to institutional quality investments previously unavailable to the average person. Security Tokens have built in investor protections, rights, and obligations utilizing a smart contract written directly into the token. Real estate is poised to be the biggest asset class ready to be tokenized.
A ‘token’ is a digital symbol of ownership. On blockchain you own a token in the same way you own the deed (or title) to a house or car. With the deed, the piece of paper has no value, it represents the value. It is symbolizing ownership of the house or car. Extending the analogy further, the deed to the house is registered with a government or private authority to show chain of title and confirm ownership.
Blockchain Is A Distributed Ledger
A blockchain is a distributed ledger which is basically a growing list of records, called blocks, that are linked together using cryptography. Each block contains a “cryptographic hash (mathematical algorithm) of the previous block, combined with a timestamp, and the transaction data. A Distributed Ledger is possible because the worldwide nature of the internet allows a consensus of replicated, shared, and synchronized digital data geographically spread across multiple computers, sites, and countries.
The token is in essence the “deed” or “title” digitally recorded onto the blockchain. A token is a digital asset that cannot be duplicated. By design, if a blockchain is changed or modified it shows up throughout the distributed ledger network. When you send someone a token you cannot keep a copy for yourself. Bitcoin was the first digital token.
Derek Edward Schloss is the Director of Strategy at Security Token Academy, the leading educational platform for the security token industry. In this episode, Derek reads his latest published piece — “Security Tokens and The Formatting Revolution”. In the episode, Derek explains that the idea of taking securities and placing them on blockchains can be best understood as a simple formatting revolution that’s three thousand years in the making.
Related Resource: The Blockchain Real Estate Summit
Tokenization Creates Fractional Ownership
Tokenization is the process of taking an asset wrapping that asset with a ‘digital wrapper’ so it can be accessed via the blockchain. The tokens can convey direct ownership in the asset; or equity ownership of a company/partnership/LLC/fund that owns the asset(s); debt secured by the asset(s); or any type of derivative investment product such as the only the income (cash flow) or value increase (appreciation) on a real estate investment.
With Tokenization you can create fractional ownership of an asset. The really cool part about Tokenization is that subject to limitations of the issuer, each ownership piece can be further divided, sold peer-to-peer or listed on a secondary exchange, or even pledged as collateral. It opens up a whole new world of investment which will eventually create opportunity for ownership of high quality assets, heretofore reserved for the big guys, to every individual investor in the world. Security Tokens will democratise investing and create wealth on an unheard of scale.
What Are Smart Contracts?
Smart Contracts are software applications that operate on blockchain protocols to automatically execute decisions programmed into the agreement when the terms of the agreement are achieved in part or in whole. A Smart Contract decision making process can be described as “If This, Then That” or ITTT.
Smart Contracts are easiest to understand with the example of a vending machine. You are thirsty and want to buy a bottle of water from the machine. It is 2 Euros for a bottle of water. You put the coins in the machine, select the item and the machine dispenses the water bottle to you. The “If This” in this example is 2€ for the bottle of water. If the 2€ is deposited into the machine and they are authentic euro coins, then the machine releases the bottle of water.
A real estate investing Smart Contract example would be if you buy a property with a friend and tokenize it with a Smart Contract. The property is acquired for $100,000 and you both agree to split any profits or losses fifty/fifty (50%/50%). If you sell the property for a profit at $120,000, each partner would receive $60,000.
Standardization Of Smart Contracts Is The Foundation Of Financial Instruments
The most widely used protocol is the ERC-20 (Ethereum Request for Comment 20) which runs on the Ethereum blockchain. ERC-20 provides developers with technical guidance for construction of a token using six functions:
1) TotalSupply;
2) BalanceOf;
3) TransferTo;
4) TransferFrom;
5) Approval;
6) Allowance.
These basic functionality components, which include how the tokens are transferred and how users can access data regarding a specific token, are in essence the operating software of the system. Most Security Tokens and financial instruments on the Ethereum blockchain utilize the ERC20 technical standard for Smart Contracts.
Ethereum uses Proof Of Work to “mine” power it’s transactions on the network. Newer blockchain protocols which are based on Proof Of Stake are much faster. Less expensive to use and require less energy to facilitate the transactions. One of the best blockchain protocol networks for financial assets is Algorand. Algorand uses a unique pure proof-of-stake consensus mechanism that provides scalability, security, speed and the certainty of execution needed for the future financial system. Silvio Micali, the founder of Algorand is an M.I.T. professor, mathematician and cryptographer who is co-inventor of zero-knowledge proofs, upon which the cryptography of all blockchain technology depends. We like to think of Silvio Micali as the “Godfather Of Blockchain”.
Algorand uses its own form of standardized Smart Contracts: Algorand Smart Contracts (ASC1) which are successfully running USDC stable coins and other critical infrastructure financial applications.
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Benefits Of Tokenization
Wealth creates financial freedom. Wealth with a wider distribution creates flourishing communities. Real estate is one of the largest investment asset classes in the world. Real estate on the blockchain potentially opens the wealth creating benefits of real estate to billions of people around the world.
Tokenization (Blockchain Real Estate Investing 2020 – Special Report) of assets will lower the barrier for investor entry into high quality commercial real investments. Security Tokens will create liquidity for investors and investment sponsors by opening up a truly global pool of capital to buy, sell and invest. Any person with a phone connected to the internet would potentially be able to invest. Anyone with a great idea and ability to execute would be able to create investment opportunities.
“One of the other benefits is that you can have truly global assets” Dan Dooney – CEO of Securancy.
Security Tokens are in actuality programmable securities in that the ownership shares, management, and financial arrangements are embedded into the Smart Contracts that control the lifecycle of the investment. The Smart Contract automatically executes important processes such as monthly distribution payment (cash flow aka mailbox money) and accounts for percentage of ownership which also reduces costs. Most important, doing business on the blockchain creates transparency with an immutable ledger and security using cryptographic encryption. The Distributed Ledger design protects assets by “append-only” transactions which means that every action taken in the past is publicly available (privacy of individuals is protected) to investors, owners and regulators.
Related Resource: Register Now For The Blockchain Real Estate Summit
List Of Benefits For Security Tokens
Compliance
- Document and investor verification (KYC & AML)
- Distributions (Income or Cash Flow or Dividends)
- Transfer of Economic Rights
- Built-in regulatory compliance
Liquidity
- Peer-to-Peer Trading
- Alternative Trading Systems (ATS)
- Secondary Exchanges
Cost Efficiency
- Minimizing intermediaries
- Automated reconciliation
- Small investment amounts possible
Settlement Time
- Tokens are sold/transferred with an expedited settlement time
- Provides access to capital almost instantaneously
- Around-the-clock access
Security & Transparency
- Secure & visible record keeping leveraging blockchain technology
- Transactions processed are immutable & irrevocable
- Higher degree of accuracy than paper based legacy systems
Structured Products
- The creation of additionally layered financial products
- The ability to unlock equity for other uses
- Customizable – the ability to add to, combine or divide tokens into smaller fractions
Security Tokens Are Regulated Securities
Security Tokens are different from the more commonly known ICO (Initial Coin Offering) in that they are regulated by the governing authorities where they are headquartered or sold.
Andrew Bull, a partner with Bull Blockchain Law LLC, has said: “a Security Token Offering differ from an Initial Coin Offering in that security tokens are either registered with a Securities Governing authority in the jurisdiction where the tokens are offered, or the tokens are filed under an exemption, which typically makes the tokens restricted securities.”
Security Tokens issued or promoted to United States investors must comply with the Securities Exchange Commission (SEC) regulations and you will more than likely need to be an accredited investor if they are offered under the Regulation D exemptions. If offered to non US investors the token would have to comply with Regulation S. There may be opportunities for non-accredited investors to get in on the action if a sponsor issued a Reg A+. All of these offerings have to comply with “Know Your Customer (KYC) and Anti Money Laundering laws (AML) in almost any jurisdiction.
What Can Be Tokenized?
- Equity Tokenization
- Debt Tokenization
- Portfolio Tokenization
- Real Estate Tokenization
- Art Tokenization
Impediments To Security Token Adoption
The major impediment and the proverbial “elephant in the room” tokenized securities are that many people associate them with crypto currencies and the Wild West period of ICO scams. While Security Token Offerings (STO) and Initial Coin Offerings (ICO) share the same underlying technology, STOs are regulated securities that are compliant with financial authorities such as Australian Securities and Investments Commission (ASIC), European Securities and Markets Authority (ESMA), Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN), Financial Conduct Authority (FCA), Monetary Authority of Singapore (MAS), Dubai Financial Services Authority (DFSA), Securities & Futures Commission of Hong Kong (SFCHK), Securities and Exchange Board of India (SEBI) and the US Securities Exchange Commission (SEC).
Another hurdle to mass adoption will be explaining the steps necessary for an individual to invest in a Security Token Offering and creating a user experience that makes it effortless to own Security Tokens.
The first STO were launched only a few years ago which makes them relatively new but large and trusted financial firms such as Morgan Stanley, Nomura, ACPR Banque de France and Deutsche Bank have all issued or are in the process of issuing Security Token offerings and Digital Assets.
Security Tokens Are The Future
Security Tokens will open up traditionally local and illiquid investments, especially real estate investment to a worldwide pool of investors looking for high quality, stable investments. Security Tokens will create additional investment options for millions, if not billions of individuals looking to benefit from the traditional advantages of real estate wealth creation and preservation.
Peter Theil said in Zero to One “Look at what in your industry do you think is inevitable but no one sees coming”.
Security Tokens and blockchain technology are the future of commercial real estate investment. Liberty Real Estate Fund was created because we can see the future is now. LibertyFund.io is the World’s First Single-Tenant Net-Lease Security Token FundTM, joining blockchain technology and 30+ years of institutional real estate investment experience to deliver stable, diversified, tax efficient returns combined with liquidity, security and transparency.
The fund will invest in Single-Tenant Net-Lease properties and is structured for investors to achieve: Geographic Diversification; Industry Diversification; Tenant Credit Strength and is built with hard assets that have intrinsic value. Our portfolio of Net Lease properties is constructed with brand-name Essential Businesses operating in high growth markets throughout the United States. Net Lease assets have long term contractual rents backed by excellent brand name companies which is why they are known as “Bonds Wrapped In Real Estate”.
LibertyFund was founded by an experienced real estate team who believes that Security Tokens are superior to traditional investment methods because investors will benefit from liquidity, cost efficiency and transparency provided by the blockchain.
You can always try out commercial real estate investing with the extremely experienced team at Liberty Real Estate Fund which combines the ease of opening a brokerage account and the liquidity provided by Tradable Private Real Estate.
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Footnotes:
Brooklyn Nets Spencer Dinwiddie Makes Case For Tokenization https://www.coindesk.com/the-brooklyn-nets-spencer-dinwiddie-makes-the-bull-case-for-tokenizing-entertainers?jwsource=cl
# Security http://www.securitytokenadvisors.com/#security
Securities Exchange Commission on ICOs https://www.sec.gov/ICO
Deloitte Report Tokenization Of Assets Disprupting Finacial Industry https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-tokenization-of-assets-disrupting-financial-industry.pdf
Security Tokens Almost Failed https://medium.com/security-token-group/security-tokens-almost-failed-e00857484e0e
Tokenizing Corporate Capital Stock https://gabrielshapiro.wordpress.com/2018/10/28/2/
The Tokenisation of Assets and Potential Implications for Financial Markets
http://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.pdf
*Note: Note: Liberty Real Estate Fund I LP and Liberty Equity Management LLC (collectively LibertyFund.io) have made every attempt to ensure the accuracy and reliability of the information provided. Liberty cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.
DISCLOSURES, LEGAL AND TAX COUNSEL: Liberty Real Estate Fund and Concordia Equity Partners LLC. (collectively “LibertyFund”) and their affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or undertaking. LibertyFund highly encourages individuals and investors to seek the counsel of a qualified attorney as well as seek the counsel of a tax professional or Certified Public Accountant (CPA) to determine if there are any potential tax liabilities or consequences as the result of anything contained herein. NO GUARANTEE: All users of this website should understand there are NO GUARANTEES of any success, outcome or profitability of any transaction or undertaking, expressed or implied by LibertyFund or any of its members, shareholders, officers or affiliates and will NOT be liable for any financial or other losses or damages incurred as a result of any undertaking. Go HERE to view complete DISCLOSURES.
