What are Security Tokens and do you need to embrace or even understand blockchain or cryptocurrency to benefit from STOs? We will explore the definition, the mechanism and the benefits of Security Tokens when it comes to wealth management in Southeast Asia.
In Asia, Southeast Asia particularly, we are seeing the rise of a new class of younger mass affluent investors who value customization, flexibility and cost efficiency in wealth management. This generation will continue to grow and is expected to reach 136 million population by 2030.
Furthermore, these investors are digitally savvy – 64% of the mass affluent in ASEAN countries are under the age of 40 and 24% are under the age of 25.
Blockchain and tokenization can shape the future of wealth management, by allowing superior access and liquidity through the concept of STOs backed by real assets.
Interestingly, December marked the 10th anniversary of Bernie Madoff’s arrest, which uncovered a deception lasting over 30 years costing investors over USD65 billion. If blockchain did exist back then,
the complex web of accounting fraud may have been prevented. By tokenizing investments and putting all transaction information on the blockchain, all relevant records are visible to investors, regulators, and auditors. And because of the immutability, the fund manager will not be able to fake or change the data.
STOs also promote good behavior in the financial ecosystem, as transparency continues to be a key theme in the industry.
So what is a Security Token?
Security Tokens are securities and fulfill the definition of such according to the Howey Test. Security Tokens are digital representations of ownership over an asset – this can be funds, equity, debt, physical assets, etc. Just like paper-based certificates for equities or bonds can be issued to investors, tokenized securities can be issued using blockchain.
Most Initial Coin Offerings (ICOs) argue their tokens are utilities (i.e. provide the user with access to a service or ecosystem) and not securities. However, buyer beware as more than 80% of ICOs in 2017 have been found to be fraudulent and most have used ICOs as a get-rich-quick fundraising scheme.
On the contrary, Security Tokens have to be compliant with existing securities regulations. Its value is derived from an underlying asset; subsequently, it is subject to government laws controlling traditional securities. To issue security tokens, issuers need to do all the necessary paperwork, and only investors who have undergone proper KYC and AML compliance have a right to buy and trade them.