5 Key Features Of A Security Token You Need To Know

What are security tokens? What are their necessary building blocks?

photo credit: Quantitatives

In recent years, there has been a growing trend of companies issuing security tokens. A security token is a digital asset that is backed by a real-world asset, such as a commodity, real estate, or a fiat currency.

The key features of a security token are that it can be easily traded, it is backed by a real-world asset, and it brings benefits to both the issuer and the holder. Security tokens have the potential to revolutionize the way that companies raise capital and the way that investors trade.

In this blog post, we will explore the key features of security tokens.

Blog Outline

• Security Administration
• Compliance
• KYC & AML
• Accounting & Reporting
• Safety mechanisms
• Summary

1. Security Administration

There are a lot of stages and activities that are important for security. To make sure that the financial marketplace is safe, and to reduce the risk of security issues, tokens should be designed to handle these aspects of administration in a strong, organized, and automated way. Tokens should be created to address a number of issues, like the following:

• Issuance and redemption
• Security transfers
• Risk mitigation
• Distributions of payments, splits, tenders, or other corporate actions
• Stakeholder voting
• Investor relations and communications
• Tax withholdings
• Net asset value calculation
• Regulatory compliance and reporting

Tokenization can help automate, standardize, streamline, and provide transparency to many processes, which can help reduce the risk for both issuers and investors. A well-designed security token can have many of the features and capabilities needed to handle many administrative duties.

2. Compliance

Regulatory agencies all over the place need issuers of securities to take some extra steps to make sure that everyone is following all the laws and procedures when the security is being issued. There have to be some extra safeguards to make sure that the security and its owners stay compliant. This is a huge pain for the promoters, but luckily, there are ways to build protocols into security tokens so that they will stay compliant and avoid illegal activities.

Compliance processes can be simpler and more efficient when built into the security itself, through token standards or smart contracts. This can help reduce costs when compared to traditional paper-form securities.

The substitution of code for middlemen allows a security issuer to meet all regulatory rules and reduces the risks of government interference. This also eliminates bad actors and provides assurance of proper compliance. By reducing the uncertainty, investors will have more confidence in what they are buying.

3. KYC & AML

In terms of regulations, it is crucial for an issuer to be aware of the following information:

• who is buying the asset?
• how did they learn about the project?
• in what jurisdiction does the buyer reside?
• when did they purchase the asset?

Procedures such as Know Your Customer (KYC) and Anti Money Laundering(AML) are two of the most key regulatory aspects for a security issuer to take into account. It is legally required for an investor to have both of these things before taking any financial interest in a security.

Investors want an onboarding process that is as easy and smooth as possible. If an investor wants to buy assets from different companies, they will have to give their personal information over and over because each vendor does their own onboarding research.

The use of blockchain-based protocols to check real-world identities allows for quick and inexpensive due diligence of investors. The software can verify that a specific wallet address corresponds to a particular person or entity in real-time. This will help to easily determine whether the party buying or selling a security token is compliant or if additional screening and information is necessary.

4. Accounting & Reporting

Digital platforms getting all up in our business will allow for automated reporting and analytics generation, as well as the full dissemination of financial statements to shareholders and regulators. Tokenization also creates a mechanism for better tracking and audit capabilities. In other words, through digitalization, systems will be much more efficient than current manual processes; again, this saves us time and money while providing better accountability.

Security tokens will also help improve a project’s communication with investors. With electronic dissemination of information, project updates and other communications can be sent to all stakeholders at once with just a click of a button. Additionally, blockchain technology will allow for proper accounting of taxes and withholdings on all distributions, making the overall process more efficient. Finally, expensive annual meetings could potentially be replaced through online voting and investor feedback.

5. Safety Mechanisms

Lost or Stolen Tokens: Circumstances may arise that require the recovery or transfer of a security token. Properly constructed tokens should offer the ability to reissue the tokens to their rightful holders in such an event.

For example, if a token holder died, their heirs would want to claim legal ownership. There’s no good reason why this value should be stranded just because the new beneficiary didn’t have the proper passwords to a wallet or access to a security token. Other considerations like law-enforcement actions, sanctions, or court-ordered settlements could necessitate the forceful transfer of a security token.

Changes in Regulatory Environment: If blockchain technology fails or some sort of regulatory shutdown occurs, a token issuer will always have the ability to revert back to paper. It is important to remember that a blockchain is simply a distributed ledger that records who owns an asset and the recorded aspects around that ownership. So, if something happens due to an unlikely event, you will always know what is owned and who owns it.

Code Audits: Exchanges, issuers, and investors will need to see a token’s programming code to verify its safety and robustness. Code auditing professionals will examine each line of code with the intent of discovering bugs, potential security breaches, or violations of proper conventions or protocols.

A code audit is a key to reducing errors before the token is released. The audit inspects each important component of the token’s code separately and as a whole. If a vulnerability is detected, its risk can be eliminated or mitigated before any problems arise.

Summary

• Security tokens need to be designed to deal with issues that are likely to occur throughout their lifecycle. This includes embedding features into the token itself to handle administration and compliance.
• Tokens can help make regulatory issues like Know Your Customer(KYC) and Anti-Money-Laundering (AML) more efficient.
• Security tokens can reduce costs over time for both issuers and investors by containing certain features.
• Security tokens offer better safety and more transparency.