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What is a Security Token?

September 20, 2018


No, it is not simply a regulatory definition for a Cryptocurrency. It is also not some sort of plot to thwart Satoshi’s original vision for handing the ownership of money back to the average person.


In truth, the definition and overall existence of Security Tokens seems to lie somewhere in between a regulatory definition for Cryptocurrencies and something else entirely. 


As some of you may already be aware, Medium is a website that is becoming more and more important to the Blockchain industry by the day, because the space’s current thought leaders continue to congregate and publish pieces there. 


One writer who is swiftly becoming a thought leader, due to the success of his Twitter following, his podcast, as well as his asset management firm, is Anthony Pompliano. Pompliano has positioned himself as authority in the space by avoiding bashing certain coins, while shilling others. Instead, he focuses on applying his overall business knowledge to the development of the space.


To pause for a moment here, if you do not already know, in the Crypto space, shilling refers to openly pushing people to invest in a certain Cryptocurrency because of all of the great things that you’re telling them about it. In more concrete terms, if you’re a shill, you’re like an informercial charlatan. 


In Pompliano’s work, what he seems to champion is achieving a consistently balanced analysis of the Cryptocurrency space, which will be helpful to institutional and individual investors alike. 


His article on security tokens is no exception to this rule. In it, Pompliano or “Pomp,” as he likes to be called, gets into all sides of the security token debate in an attempt to come to a universal understanding of how we can understand security tokens. 


In the beginning, in order to take the suggested framework of a security token as true, according to Pomp, we have to take the Swiss Financial Market Supervisory Authority’s regulatory definition of the types of Cryptocurrencies as true. 


What this office or FINMA says about Cryptocurrencies is that they can be classified as three types: payment tokens, utility tokens and security tokens, which are also called “asset tokens.”


Pomp then shares the accepted definition of these types of Crypto coins, which boil down to: payment tokens are a means of currency or payment, while utility tokens are used to gain access to some sort of digital platform. Following this, he makes clear that the situation is a bit more complicated, with regards to defining security tokens and their place in the Blockchain industry.


In short, he mentions the current regulatory definition of security tokens, which basically amounts to them being a way of connecting a Cryptocurrency, with some sort of existing financial product or asset. In connection with this, he adds that the main utility of a security token is in its use as a proof of ownership as well as bridge for the average investor to reach specialized assets without the help of an investment firm. 


Even though his piece is much more comprehensive on this subject and goes into just about every possible niche use case for security tokens, for now, we will focus on the question that this idea of a bridge raises. 


If Cryptocurrencies already exist which allow the everyman and everywoman to invest in typically specialized investment products, without the help of an investment firm, then where is the incentive for Wall Street and the rest of the traditional finance world to continue to support the rise of Blockchain technology?


On one level, it appears that all this existence of a bridge would require is a pivot from investment firms from more personalized assistance to a Blockchain model of doing business. In other words, they might just have to learn to be more hands off, while still making a profit in new ways.


The issue that appears to remain if all of this is true is: where exactly will these profits come from?


Answering this question would require the input of firms who have adopted the Blockchain and yet kept their traditional lines of business, therefore continuing forward with hybrid business models. Even without this specialized, proprietary knowledge, it is still possible to make one major conclusion on how a security token could benefit an investment firm or any traditional business. 


Because they ostensibly increase the efficiency of business processes, especially those that are paperwork intensive, then they may also be said to ostensibly increase decrease the cost of these processes. What is perhaps the prime example of how this can play out is almost any business deal can be settled instantly, at least in theory. For true examples of why this works, take a look at the inner workings of smart contracts. 


If enterprising firms who hope to succeed in a swiftly changing financial world start here, then they just might become the disruptors instead of those who become obsolete. 



By: BGN Editorial Staff

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