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Did you know that as of recently you can buy equities using cryptocurrencies, or digital tokens?
Blockchain technology is revolutionizing traditional financial investments. Indeed, more and more banking institutions want to go through the blockchain to offer the issuance of financial instruments on it.
What does blockchain look like applied to financial assets? Transactions and exchanges of information are verified by so-called "miners ', which provide a high level of security and trust by verifying and validating transactions within the framework of a validation consensus (generally, in "Proof of Work" or proof of work). This IT consensus makes it possible to develop a transparent, decentralized, and secure database. Applied to the exchange of financial assets, the blockchain makes it possible to provide a high level of security.
The tokenization of financial assets is of interest to both the token issuer and the investor. So let's look at what are the exact benefits for both.
The investors' benefits
When investors decides to invest in traditional financial assets, they will have several options, including:
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The purchase of shares in listed or unlisted companies;
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The purchase of bonds;
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The purchase of debt securities;
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The purchase of company shares;
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The purchase of fund units of UCITS (Undertaking for Collective Investment in Transferable Securities) which includes SICAVs (Investment Companies with Variable Capital) and FCPs (Community Funds).
Finally, one of the main perks of share tokenization is that investors can purchase just a fraction of a share. If the share is pricey, you can buy some of it and diversify on other costly shares. One of the first companies to digitize their shares is Tesla electric vehicles manufacturer with its Tesla token. It was recently available on Binance, but the token has been withdrawn from this platform due to regulation obstacles.
How does the issuer benefit from the tokenization of financial securities and shares?
Any listed or unlisted commercial company can decide to tokenize its shares. Similarly, civil society can also decide to tokenize its shares on a blockchain. For this, the company will have to carry out tokenization of the identified financial instrument, i.eThe process allowing a financial instrument and the rights attached to it to be backed by a digital token to register it on a blockchain.
It will be necessary to determine what rights will be attached to each token (rights to dividends, voting rights, and rights to information).
The smart contract allows automating the terms and conditions for the transfer of shares without a trusted third party intervening. The company must also carry out an STO (Security Token Offering). By analogy with IPOs (Initial Public Offerings), STOs are fundraising by issuing tokens intended to represent financial securities registered on the blockchain.
As for the Initial Coin Offering (ICO) and the IPO, the token issuer by STO security token offering will offer its tokens for sale against cryptocurrency and then offer the purchase (re) sale to the public on a secondary market of its tokens. What changes the operation's very nature is the underlying asset's legal qualification.
In the case of an STO, the value of the token will depend on the price of the underlying asset:
The value of the underlying financial instrument will depend on the game of supply and demand in a regulated market or not; The issuer of the token originally decided the price.
Good to know: as part of an STO, smart contracts can also be programmed to automate regulatory compliance processes for the Fight Against Money Laundering and Terrorist Financing (LCB-FT) and verification and identification investors (KYC for Know Your Customer) necessary for any STO.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.