What are tokenised securities?
A tokenised security is a blockchain-based tradable financial asset which represents an investment in another asset. To understand the term let’s first define a security.
A security is a negotiable financial asset that holds some type of value. Securities can be broken down into three main types:
- Equity is an investment in common or preferred stock issued by another company.
- Debt represents money that has been borrowed and needs to be repaid.
- Investment funds are pools of capital belonging to numerous investors used to collectively purchase a security or an asset with each investor retaining their individual percentage ownership.
Tokenised securities definition
Security tokenisation is when the ownership of a security is materialised through the issuance of a “token” registered on a distributed ledger technology (DLT) infrastructure or blockchain. A tokenised security can be equity, a bond or an investment fund.
An interesting characteristic of tokenised securities is that they can also represent ownership in assets which are notoriously illiquid, like real estate and fine art. These tokens can then be traded freely, reducing barriers to entry in these markets.
Tokenised securities can operate more efficiently than traditional securities as they reduce the cost associated with processing transactions, reduce the need for middlemen (in a case with real estate, for example) and decrease settlement times.
A token representing ownership rights can be subdivided and traded with a record of all trades and ownership stored on a blockchain system. Distributed ledger technology developed for cryptocurrencies replaces third-party record keepers.
Blockchain technology runs complex algorithms to maintain the ledger of transactions and verify ownership. These tokens are initiated through Security Token Offerings (STO) and as they are backed by tangible securities, unlike cryptocurrencies, they are regulated in the jurisdiction they are offered.