Tokenized Securities: What can be Tokenized?

As you may or may not be known by now, Brickken deals with tokenized securities (Security Tokens). Securities that reside legally on the blockchain but are also acknowledged outside of the blockchain system as just that, a Security.

But what does this actually mean?

The purpose of this post is not really to describe the benefits of Security Tokens, but rather to provide a deeper understanding of what is meant by tokenizing close to anything.

For those happy with a conceptualized understanding and its major advantages, we recommend reading the following article, which beautifully illustrates the benefits of tokenized real estate and how it is a game-changer in terms of asset ownership and management. This example can be applied to any asset and opens up new doors of investment opportunities, business structures, liquidity, and much more.

But Real Estate cannot technically be tokenized into a Security Token. So why do we use it as an example?

The fact of the matter is, that the vast majority of things are not securities. Hard assets such as Baseball cards or Art is in reality not categorized as a Security. Nor are intangible assets like Intellectual Property (IP), Patents, and Trademarks. Not even futures contracts relating to commodities ( futures contracts relating to securities, however, is).

So do we exaggerate in stating that close to any asset can be tokenized into a “Security Token”?

After all, hard assets and intangible assets make up a pretty significant fraction of assets in general.

Well, yes and no…

First thing first, what is a Security?

Most people may recognize the famous Howey Test, resulting from the Supreme Court Case SEC v W.J. Howey CO in 1946. We will not make this unnecessarily complicated, but essentially there are 4 components to whether an asset is considered a Security or not:

  1. An investment of money
  2. Expectation of Profit
  3. A Common Enterprise
  4. Depends “solely” for its success on the efforts of others

Based on these criteria, there are 4 main forms of Securities;

  • Equity Securities ( shares in a Common Enterprise, Company )
  • Debt Securities (also issued through a Common Enterprise, Company)
  • Hybrid Securities (A combination of debt and equity securities)
  • Derivatives securities (contract between two or more parties, with its value dependent on the price of the underlying asset)

Furthermore, you have stock options, other derivatives associated directly with Equity/Debt, certificates of deposits, and much more.

Excluded from the list, however, are the previously mentioned Hard- and Intangible Assets.

Introducing Asset-Backed Securities

As the name indicates, these are legal securities with an underlying asset. In the Traditional Finance (TradFi) world, the most common underlying asset of these Securities are Home Equity loans, Student loans, and Auto loans.

These are loans taken by private individuals who cannot issue Securities. But companies owning the assets can.

The private loan assets are traditionally bought by financial institutions that repackage and pool them together. From this, institutions can sell the private debt to retail investors as they are now categorized as securities.

In simple terms, an investor gets exposure to the mortgage debt market but in the form of debt assets with varying risk levels.

This may bring your mind to the 2008 subprime mortgage crisis, and you would be correct. It was exactly this type of Asset-Backed Securities that became a cornerstone of the whole event, although with a big portion of fraud and manipulation of reality in the mix.

But it is the same principle of creating publicly tradeable securities out of an underlying asset that otherwise would not be categorized as such.

So back to the question. What can be Tokenized?

Again it depends on local legislation. But considering securities can only be issued by companies, the only question is…

What can a Company Own?

The answer to this is close to any Physical Asset and any Intangible Asset.

Let´s offer two examples to bring all of this into context

  1. Collective ownership of a Baseball Card As we have learned, Hard Assets are not Securities. But Company Equity & Debt is.By creating a legal entity (Company) that in turn owns that asset, one can legally bring the Company stock ownership on-chain, fractionalize it, and reap the full benefits of blockchain technology alongside direct ownership of a fraction of a valuable asset. In this case a rare Baseball Card, or a piece of art.

    As you may understand by now, this can practically be done with any composition of hard- or intangible assets.

  2. Business Expansion The same principle goes for a particular business unit or division. One can create a separate legal entity (for example a Special Purpose Vehicle), and bring that company on chain. Therefore, raising capital and selling ownership for a specific part or effort of the business, and not the company as a whole. Naturally, this can be done in layers of offerings with any composition of Equity/Debt/Derivatives.

The second option is forecasted to be one of the main ways as it introduces new ways of raising funds for traditional business ventures.

Conclusion

With these two examples, one can understand the potential and promise that tokenization has in opening up the diversification of portfolios into assets with historic barriers. The potential that we yet again want to refer to is highlighted in this post.

If you are just as intrigued about the potential of Security Token Offerings and want to dive a bit deeper. Click on this link for a more comprehensive guide about Asset Tokenization. We promise you will love it!

Brickken will take these steps further by not only providing the tech and infrastructure for all kinds of Security Token Offerings (STOs) but instead offering a full management solution for businesses to integrate into a web3 environment.

Read more about the reiterated and updated Whitepaper 2.0 here.

So do we lie when saying that close to any asset can be made into a Security Token?

Kind of… But not really…

Published On: July 14, 2022Categories: Legal0 Comments

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