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What are Securities in 2021?

10.05.2021

What are securities in 2021?

If it doesn’t ring a bell or rings a bell vaguely, our fresh-from-the-oven guide will shed light on the subject.

Introduction

Let’s start with the very basics. To put it as simply as possible, securities are financial contracts that grant the owner a stake in an asset.

Generally, securities have two main features:

  1. they give certain rights to the owner; and
  2. they can be traded in the financial markets.

There are various types of securities, including bonds, stocks, and options to name the most common ones.

Securities in the Crypto Market

The examples above clearly derive from the institutional world. What are securities in 2021? Crypto related. The right answer is – the security token.

The Howey Test

Before we elaborate any further, the Howey Test deserves an explanation.

In 1946, the Supreme Court handled an important case that would lay down the foundation for the test in question.

Two corporate defendants based in Florida offered real estate contracts for tracts of land with citrus groves. They essentially offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land and harvest the citrus. Most of the buyers were not farmers and didn’t have agricultural expertise. So, they were happy to lease the land back to the defendants. This is where the SEC stepped in.

The U.S. Securities and Exchange Commission (SEC) deemed this illegal and sued the defendants. Why? The SEC saw a problem in defendants not filing a securities registration statement. Their investigation showed that the leaseback was indeed a security. This became a landmark decision.

A test framework was developed to determine whether a transaction is an investment contract or not. If it is, it will be subject to the securities registration requirement. What are the criteria?

  • It is an investment of money.
  • The investment is in a common enterprise.
  • There is an expectation of profit from the work of the promoters or the third party.

If a crypto token passes the Howey Test, it qualifies as a security token that is subject to federal securities and regulations.

What is a Security Token?

At its very essence, a security token is an investment contract that represents legal ownership of a physical or digital asset. This ownership is verified within the blockchain.

After verification, security token holders are eligible for several actions, one of the most important of which being trading their tokens. However, this requires a functioning secondary market, which is often overlooked in favor of the primary market.

Types of Security Tokens

There are four common types of security tokens: equity token, debt token, real asset token, and non-fungible token.

Equity Token

Equity tokens represent the value of shares issued by a company on the blockchain. When it comes to the method of recording ownership, for an equity token, it’s recording on an immutable blockchain.

Owning an equity token entitles the investor a portion of the company’s profits and a right to vote. Equally important, these tokens aren’t limited to only the early stages of funding.

Debt Token

Debt tokens represent debt instruments, such as real estate mortgages and corporate bonds.

In blockchain terms, the smart contract representing this type of security token should not only include such operations as repayment terms that dictate the dividend model, but also incorporate the different risk factors of the underlying debt.

Real Asset Token

Real asset tokens represent ownership to a certain asset, e.g., real estate or commodities. The latter are complicated due to certain inefficiencies and transactions that typically involve multiple parties. However, blockchain technology enables transparent recording of complicated transactions, tracking goods, and reducing fraud.

Non-Fungible Token

What are securities in 2021? Oftetimes, something never before heard of. Non-fungible tokens (NFTs) are a real phenomenon that began when Beeple’s digital art piece Everydays: The First 5000 Days sold at Christie’s for the unbelievable $69 million.

NFTs are issued on a distributed ledger. They are absolutely unique because each image or piece of content is linked to a single token stored in a smart contract on the distributed ledger, whereas ownership can be irrefutably established.

Securities Marketplaces

It all sounds great in theory. But as mentioned above, securities marketplaces are somewhat difficult to find. Digital securities marketplace has seen plenty of hype in the past couple of years. Yet, there are few on the market.

CoinMetro’s partnership with Ignium is a pioneer. Ignium is a Central Securities Depository built on blockchain technology. The partnership between CoinMetro and Ignium’s CSD allows both retail and institutional investors to purchase digital bonds, convertibles, and equities in already established and upcoming companies raising funding.

In short, CoinMetro provides the platform for investors to purchase the securities and the secondary marketplace for trading. Ignium provides the issuance, primary distribution, registrar, and settlement of the digital securities as well as corporate services for the issuers. 

Ready to start exploring? Head over to the CoinMetro digital securities marketplace for more information about what securities are in 2021.