Use of cryptocurrencies as security boost equity distribution

Wednesday, August 1st, 2018     Category: News

The margin between crypto investors and stock owners continually draw thin as some cryptocurrencies are now being seen as a form of security. Cryptocurrency in the last 4 years have continued to receive increased buzz as more Initial Coin Offering (ICO) come in play.

In recent time, question as regards classifying cryptocurrency as a form of security has crossed path with various countries securities and exchange commission (SEC) as new classification of tokens are now been made between security tokens and utility tokens.

This new classification of cryptocurrency are regarded as security tokens or better still equity tokens. Equity tokens like normal stock guarantees ownership,voting rights to an asset. By employing blockchain technology and smart contracts, a startup could forgo a traditional initial public offering (IPO) and instead issue shares and voting rights over the blockchain.

Enterprises are now operating business on the blockchain, creating cryptocurrency which are back by an asset. This cryptocurrency derive their value from the underlying asset which is external to it, making it now serve as a form of security which can be traded and held to receive dividends from the parent company. When the digital token appreciate in value, investors /holders can as well trade this tokens on a listed exchange for profit like every other cryptocurrency.

The procedure that transforms cryptocurrencies into security starts with the tokenization of asset. Tokenization is an intrinsic part of the blockchain technology that serves the purpose of platform identification and accessibility of an asset.

Speaking on this with Emmanuel Fatusin, Partner at Blockchain Asset Management, he mentioned that defining whether cryptocurrencies are securities is still up for debate. In some cases, cryptocurrencies are categorized as a security when a company initiates an ICO for a venture and is expected to give investors return on their investment via the operations of that venture. In the case of asset backed cryptocurrencies, the parent company who initiated the ICO offers a product to back the digital tokens upon which they can be used to create transaction around the asset.  In the US today, they believe that such cryptocurrencies / ICOs should be regulated by Securities and Exchange Commission (SEC).

Asset backed cryptocurrencies are made possible representing an asset on the blockchain via digital tokens, an instance where an underlying company’s asset is set to worth $1 million, this digital token issued by the company therefore can be used to purchase the asset since it is tied to it. If the price worth of 1 token is $100, this signify that 10000 tokens of the underlying company matches the worth of the asset been issued. Offering 500 tokens for this asset by individual signifies 5% ownership.

Additionally, a firm could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment. Many people believe that equity tokens will eventually become the predominant type of tokens from initial coin offering. 

According to Omobolanle Adeniran, research analyst at Cryptonomics Africa, she stated that although laid down procedures for cryptocurrency are not available in Nigeria but classifying a cryptocurrency under a security class according to US securities and Exchange Commission requires that so far it can pass the Howey test,which is a test to use to determine if an asset can guarantee dividend or a return on investment, it is termed a security.

Thousands of startup across world have sprang up thanks to ICO, with the total project for 2018 at 632 raising $12.7billion. A lot of companies are now building an entire business that revolves around the blockchain technology. The usual route which involves  firm turning to public stock markets or venture capital to raise fund for their company are now turning to cryptocurrencies.

A number of cryptocurrency projects are actively embracing the move to blockchain securities and creating their own protocols. One such project is the Polymath Network, which raised an ICO last year to become a platform for issuing a range of security tokens. They are working on a security token standard called the ST-20 standard — basically a security token counterpart to Ethereum’s ERC20 standard. “We’ve seen the benefits [security tokens] have over traditional forms of ownership like paper share certificates,” Polymath VP Graeme Moore.

With tokens, you can have markets open 24/7/365 (instead of being open weekdays 10:15am-2:30pm), trade fees that approach zero over time (instead of NSE 0.3 percent), instantaneous settlement and raising of capital will be so much  easier.

Initial coin offering has been on the rise which is a method of funding for start-ups in which new digital tokens or coins are issued. Funds are raised using digital currency such as ethereum and bitcoin as well as fiat.

Cryptocurrency are built on various numbers of platforms which include new and existing blockchain technology which includes the ethereum blockchain network, Stellar blockchain, Eos blockchain and a host of others, ethereum is mostly congested as majority tokens are been created on its platform.

As waves are moving for security token which is yet to been seen as the driving buzz for the cryptocurrency community in 2018,much is still to be expected as the end of the year approaches.