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Using Security Tokens to Reduce Trading Costs on Financial Instruments

By January 2, 2019 No Comments

Digitizatized financial instruments have allowed money markers on the buy and sell side of financial markets, to witness a significant reduction in their trading costs. This disruption has introduced many new concepts including the Security Token Offering. These tokens or digital coins are offered to investors during an ICO or any other equity transaction between two parties. The digital security transaction is quite convenient and takes less time than a traditional one.

The significant difference between ‘traditional’ security and the one backing a digital token is that these tokens are easier to trade on online platforms including blockchain. Financial security can comprise of stocks, bonds, and treasury notes. As money makers shift from the traditional methods of trading printed certificates towards trading security tokens online, they might be able to reduce their transaction costs by up to 50%.

Cost Benefits of Using Security Tokens

Digital securities have significant cost benefits for stakeholders on both sides of the trade. Some of the most significant ways in which security tokens help investors and traders reduce their expenses include:

Compliance

Ensuring regulatory compliance while trading traditional securities has always been a challenge for policymakers. Before the introduction of security tokens, companies had to dedicate resources and time to differentiate between an authentic and a fake trade. This would cost them a considerable amount of money, and the chances of error still existed. Implementing compliance procedures is quite convenient and easy for lawmakers as they can use cutting-edge hardware and software technology to authenticate a trade within seconds.

Use of Blockchain Architecture

When tangible financial security is converted into a digital coin, it can be transacted using some of the most innovative online networks, such as the blockchain. Since blockchain is considered one of the most secure methods to exchange financial instruments online, it saves thousands of dollars for issuers and investors to complete their trade.

Cost of custodian

One of the significant expenses associated with the trade of old-fashioned security is the custodian costs. Before the introduction of digital security tokens, it was necessary to acquire the services of a custodian to hold the security while the money was exchanged. Besides that, the process of mailing and dealing with any issue while supplying a printed certificate was a cumbersome and expensive process. Digital securities do not require services of a custodian and can be traded without any error in no time.

Dispute costs

Tokens being traded online go through a rigorous process of authentication and validation before they are supplied to the buyer. Hence, there are minimal or no dispute costs associated with an online trade. Traditional financial instruments, on the other hand, have been prone to disputes which end-up in court and cost a lot of money for the investors.

Besides saving costs, security tokens have other intangible benefits as well. They help in creating liquidity in the market and provide marketers with an additional tool to attract their target audience.

Intrinsic Benefits of Using Security Tokens

Besides saving costs for the organization, security tokens have various intangible benefits associated with them. Some of the significant ones are mentioned below:

Can be easily traded with partners anywhere in the world – When physical certificates are linked to digital tokens, they can be traded on the buy and sell side with traders anywhere in the world. The digital security allows its owners’ multiple platforms to trade it on. From blockchain networks to online stock markets, security token opens various opportunities for clients.

Creates Brand Awareness – When organizations need to promote their brand, one effective strategy for them is to market their key selling propositions. Having a security token in place helps them to build effective marketing strategies that can be utilized on different multi-media platforms.

Saves time –Introducing security tokens at their organization allows business managers to spend less time creating checks and balances on their trades. Many of the authentication and verification tasks are performed by state-of-the-art computers that use complex algorithms to complete a trade.

Structuring of securities – With traditional certificates, it is very hard for the company to change the structure of its equity notes. Security tokens, on the other hand, give organizations the liberty to think out of the box and offer investors a chance to enter into various types of STOs.

How the market has reacted to STOs

Before the cryptocurrency network was introduced, the world was only aware of the concept of IPOs for converting public equity into tangible security certificates. With the advent of blockchain networks, people started trading on the online network using digital coins, and the concept of online stock exchange came into existence.

As online trading gained traction in the consumer market, companies started shifting from IPOs to ICOs. To understand the significant difference between the security kept in vaults, and equity tokens held in digital wallets, one needs to go back to the actual definition of security itself.

According to lawmakers, a security certificate which is eligible to be traded on a stock exchange should have the following characteristics:

  • It is majorly used for investment purposes.
  • The owner of the security can anticipate some amount of profit for holding the security.
  • The money invested in the security provides its holder some form of equity in a public enterprise.
  • The profits are generated by a third party or the equity distributing company.

Since the whole STO process is conducted online, distributors of these security tokens can complete their transactions much quicker than before. This is one of the main advantage organizations have been able to acquire through STOs.

Final Thoughts

Companies need to explore the latest trends in the online equity market to stay ahead of their competition. They need to be able to provide investors with digital equity options to raise a large sum of capital in a minimal amount of time. If STOs continues to take place in the online market, security tokens will start providing tough competition to digital currencies like Bitcoin and Ethereum.

 

Sources

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