Going into 2023, many market signals and institutions have been foreshadowing the way to the year of security tokens! While the security token industry has been held back by a number of factors including unclear regulatory framework, a lack of liquidity in the markets, and a general lack of understanding among potential investors, some of the largest financial institutions in the world are starting to take notice in the underlying value in the regulatory compliant blockchain technology that encompasses the digital asset industry.
A security token is a digital asset that represents ownership in a physical or digital asset, such as a company equity or a share of a real estate property. Unlike utility tokens, which are commonly used to access a product or service, security tokens provide holders with a share of the profits or revenue generated by the underlying asset.
Despite the potential for security tokens to revolutionize the world of finance by making it easier to invest in illiquid assets, they have not yet gained widespread adoption. This may be due in part to the fact that they are not as well-known as utility tokens, which are more commonly used in the world of cryptocurrencies. While the regulatory environment surrounding security tokens and the digital asset space is still developing, there are promising movements towards greater adoption including press releases from the CEO of BlackRock supporting tokenization along with the SEC stepping up to put in place more clear-cut legislation in 2023 to protect investor interests.
One of the biggest challenges facing the security token industry is the lack of clear regulatory frameworks. In many jurisdictions, the rules surrounding the issuance and trading of security tokens are still being developed, which has made it difficult for companies to confidently enter the market. Many developments from the SEC are sure to go underway in the first quarter of 2023, however, until these regulations are finalized, it is likely that many companies will remain on the sidelines.
Another factor to address that has been holding back the security token industry is a lack of liquidity in the trading market. Unlike traditional securities, which are traded on established stock exchanges, security tokens are often traded on specialized exchanges/alternative trading systems that have yet to gain significant traction and user base. Further, some investments in the security token space are only available to accredited investors, limiting liquidity due to lower trading volumes. This lack of liquidity makes it difficult for investors to easily sell their position, which can be a deterrent to potential investors unless they are interested for a longer hold as the market takes time to scale. While it has been slow in growth, in light of the recent crypto exchange crashes and fraud conducted in the crypto space will inspire many institutions and retail investors to seek investment opportunities with more consumer protections built into the investment products.
The major difference between a crypto and a security token comes down to the potential returns / volatility of the respective markets. For example, with early adopting security tokens such as Aspen Coin (a tokenized portion of equity in the St. Regis Aspen Hotel) and RealT tokens (fractionalized real estate equity shares only available to accredited investors), there are limited market makers that provide for efficient markets, and therefore mass adoption is still needed to drive value and growth to the security token market.
Attempts to create security tokens that produce steady income/dividends have historically ignored the need for competitive price growth and value-add to investors, while creating efficient markets to drive liquidity on the secondary markets. Advocates of security tokens have often highlighted their potential for steady returns, but overall we are optimistic to see a proven use-case for steady returns on investment going into 2023 following the crypto market crashes.
An example of a comparable security token to a cryptocurrency is a real estate investment trust as compared to dogecoin. Both assets have relatively stable price growth (in the current period of time), however the barriers to entry to be an investor in a traditional REIT used to require far greater capital contributions than what it would take to invest into Dogecoin.
Overall, it is going to take a greater understanding of the security token market by institutions as well as the retail market in 2023 for the true protections and benefits of investing in digital assets and security tokens prove their utility and value. The reality is that many people are still unfamiliar with the concept of security tokens and the benefits they offer, which makes it difficult to generate interest in the market. As the issues of regulation, mass adoption, and liquidity continue to be sorted out in 2023, it will certainly take time to see the true growth potential of the security token market to play out. As investors become familiar with the value-adds of digital assets, followed by a couple of big plays in the space led by financial institutions and retail markets alike, 2023 could very well end up as the year of the security tokens!
Jessica Burns, Head of Investor Relations & Marketing, Security Token Advisors
Linkedin: Jessica Burns
Twitter: @tokengirl305
Disclosures; Nothing in the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. All investments are highly speculative in nature and involves substantial risk of loss.