Debt security tokens refer to debt instruments such as corporate bonds or real estate that have been tokenised. The value of a debt security token depends on two key factors: risk and dividend. Risk involves the unexpected occurrences that debt security tokens are subjected to, such as drastic changes in the debt’s value or default of the debtors. While dividend, on the other hand, refers to a form of regular income the underlying debt instrument is structured to generate.
How are they regulated?
Security token offerings should be structured to follow the security laws and rules specified of the location where they are being invested or sold. Security laws that regulate the structure of STOs differ from country to country which is why traders need to ensure compliance with the appropriate regulatory requirements before seeking investments in STOs. The structure of an STO is strictly dictated by its area of incorporation. Therefore, choice of jurisdiction should be taken into account, depending on the following:
- The physical asset’s location;
- Security regulations and other laws specific to the area;
- The classification of the interest being tokenised;
- The founders’ countries of origin, for tax purposes;
- Marketing strategy and efforts that will work in said location.
What can you tokenise?
Almost every asset class is eligible for tokenisation. You can turn both intangible and tangible objects into a digital form. This can range from creditors in a debt instrument, ownership interests of a trust, shares of a company or a fund, equity in a company, diamond, gold, real estate, commodities, venture capital funds, bonds, to exotic assets like racehorses, sports teams, and artwork. The digital form of these assets now represents the token holder’s debts. Below are some of the asset classes that you can tokenise:
- Real estate: Tokenizing real estate assets open the doors for increased market and high capital participation through fractional ownership. This promotes the expansion of real estate investment markets.
- Commodities: New market opportunities would spring up from the tokenisation of commodities. It offers lesser barriers and improved liquidity to entry in asset classes when converting physical assets into tradable digital assets.
- Private equity shares: tokenisation is a viable alternative to the traditional method where information about shares and shareholders is recorded on spreadsheets or paper. Unlike the previous method, tokenisation of equity shares is more efficient and less prone to errors. It provides information to shareholders and companies through an immutable, single-shared ledger. This provides authenticity and ownership transparency for shareholders to trade on the secondary market.
- Physical goods: tokenisation of illiquid assets such as partnership shares, ownership interests in private companies, wine, artwork, and more, offers provenance, price, and lending discovery through the blockchain’s transparency.
What are the benefits?
Businesses that accept debit and credit cards are the major target for criminals due to the wealth of information they store about their customers’ payment information. Insecure systems are infiltrated by hackers who use the stolen information for their users or sell it to another party. While tokenisation doesn’t prevent a data breach, it can help protect businesses from financial fallout in case of data theft.
Tokenisation also helps to foster trust between you and your consumers. Every customer wants to be sure that their payment information and other personal data are in safe hands.
Another major peck of using tokenisation is because of the easier compliance with industry regulations, tokenisation promotes compliance with PCI DSS and addresses requirement set #3.
The majority of online selling and buying is facilitated by the technology behind tokenisation. Its application ranges from payments on the go to secure in-store PoS acceptance, and from a new generation of in-app payments to traditional e-commerce. Online transactions had never been easier and safer with tokenisation.