DEBTS/EQUITY TOKENIZATION

INTRODUCTION

With the growing adoption of blockchain, businesses are finding it convenient to adapt to the digitized crypto-version of equity shares; Say for instance, You buy shares of a renowned company during its initial public offering (IPO) or bought them on the stock exchange and have them credited in your equity shares account; It can be accounted to an equity share ownership. Hence, delineating equity shares to Tokenized equity shares can be said to work the same way, except that those shares are in the digital form of crypto coins or tokens and instead of getting credited to your equity shares account, they are credited to your blockchain related account.

Tokenized Equity

Tokenized equity refers to the creation and issuance of digital tokens or “coins” that represent equity shares in a corporation or organization. In present-day, Tokenized equity is emerging as a convenient way to raise capital in which a business issues shares in the form of digital assets such as crypto coins or tokens.

In contrast, tokenizing the business ownership in the form of equity shares on a blockchain offers a lot of flexibility in fundraising. The low-cost method allows for a more democratic way to realistically value the business depending on the direct participation of the interested investors. The valuation is mainly dependent on market forces, rather than on a select group of sponsors.

Tokenized Debt

With relative terms of acquisition of equity shares representing digital tokens by investors and companies the same can be said about companies wanting to expand operations or fund new business ventures whilst turning to the corporate bond markets to borrow money that represents tokenized debts.
Tokenized debts/Debt security tokens refer to debt instruments such as corporate bonds or real estate that have been tokenized. 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.

When companies want to expand operations or fund new business ventures, they often turn to the corporate bond market to borrow money. Unlike equities, ownership of corporate bonds does not signify an ownership interest in the company that has issued the bond. Instead, the company pays the investor a rate of interest over a period of time and repays the principal at the maturity date established at the time of the bond’s issue.

Pro´s & Con´s

Regardless of its very features governed around the essence of tokenized debts and equities, there is always its pros and cons to be wary of in within.

For instance, An organization/Small business may seek to raise money through tokenized equity for the following reasons;

  • The funding is committed to the business and its intended projects. Investors only realize their investment if the business is doing well (stock market)
  • Business owners do not have to keep up with costs of servicing bank loans or debt finance, allowing them to use the capital for business activities.
  • Outside investors expect the business to deliver value, with their help business owners can explore and execute growth ideas.
  • Some business angels and venture capitalists can bring valuable skills, contacts and experience to your business, hence assisting with strategy and key decision making.

The list goes on and on for benefits expected for tokenized equities but so shall its risks are involved too;

  • Lack of clarity around crypto regulations for investors in general.
  • There have been regular instances of theft and hacking attempts of digital assets.
  • Its Availability still not widespread and limited.

Why do Companies seek to acquire debt financing or Corporate bonds?

Of-course debts has its very own advantages to the company sector, acquiring debts finances can help to boost growth of a company/small business. Long-term debt financing may be used to finance the acquisition of products or equipment, the hiring of new staff, or the expansion of marketing. In fact, Corporate bonds offer the opportunity to invest in a variety of economic sectors, which will act as a divergence for yield and risk. Also, Corporates have the potential to provide attractive income. So its a no wonder Small business and companies go for debt financing.

In relation to companies wanting to acquire debts to funding new startups, they may face backlash of these sort;

  • Corporate bonds also comes with risks as they are exposed to interest rate risk. In addition, corporate bonds also have credit or default risk — the risk that the borrower fails to repay the loan and defaults on its obligation.
  • If the company is inadequate, taking on that much financing puts it at danger of defaulting on loan payments. Hence, dissuading investors from future commitments.
  • Future payments of principal and interest are required. It may be difficult for companies with unpredictable cash flows to meet loan payments. Losses may make meeting loan payment dates challenging.
  • A corporation that relies too heavily on debt may be deemed ‘high risk,’ which might limit a company’s ability to get equity capital in the future.

In essence, Tokenized assets and stocks will soon be the next big thing in the global market as it would look to gain more acceptability and enhance trades, funding and transactions.

Published On: December 11, 2022Categories: Legal0 Comments

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