Security Tokens Series: Security Tokens In Financial Services

4 min readMar 29, 2021

This is the fifth article in the five-part Security Tokens Series where we analyze the key characteristics of security tokens and how they will impact the future of digital assets.

In the first article in the security tokens series, we discussed how security tokens are basically digital analogs of securities that confirm ownership and give verified token holders the right to participate in their investment. The process involves issuing a security token that digitally represents a real tradable asset. It is a modern version of the traditional process of securitization.

The security tokens are created through a security token offering (STO). It is clear that security tokens will have a sizable impact on the financial services industry as well as on investment services. The following descriptions represent security token use cases in financial services as well as the potential that security tokens have to alter financial services in the future.

The Potential Of Security Tokens In Financial Services

The token economy provides the potential for a more efficient and fair financial world by reducing the friction involved in creating, buying, and selling of securities. By tokenizing assets such as fine art, these tokens can be traded on a secondary market chosen by the issuer of the token, giving them access to a larger base of traders and ultimately increasing their liquidity. Token transactions are completed with smart contracts which automate certain aspects of the transaction process. This reduces some of the administrative steps associated with buying and selling, and reduces the number of people involved in the trade, leading to a faster transaction and less expensive transaction fees.

Tokenization provides enhanced security to the process of investing in securities because the ownership stakes of investors are preserved on blockchain ledgers, and the transactions and their ownership of the assets are validated by many nodes.

Tokenization will make the investment in assets available to more people due to smaller minimum investment amounts. Minimum investment amounts of assets in traditional financial services are often too high, making them out of the price range of most individual retail investors. This has limited the number of people who can participate in traditional financial services transactions like investing in securities. Thanks to tokenization of securities, many more people will be able to make smaller investments and will have the chance to increase their wealth through investments in real tradable assets such as art and real estate.

Use Cases Of Security Tokens In Financial Services

You can technically invest in practically any type of security using a security token, but a couple of use cases have already been implemented or are already in development, and the results could be game-changing.

Real Estate

Companies such as RealBlocks and others have begun the process of tokenizing real estate assets. One of the main benefits of tokenizing financial services associated with real estate transactions is the fractional ownership made possible through security tokens. Security tokens can represent fractions of smaller units, meaning that a real estate company could offer the opportunity to a large number of investors, where each investor allocates a small amount for partial ownership of a property. Whereas many individual investors don’t have the capital to purchase an entire office building or other property, they could potentially afford to buy just a small fraction of the ownership through a security token. This opens real estate investment to a larger number of investors, and specifically to people who cannot afford to invest large amounts in real estate holdings.

Art

The same process utilized for real estate, can also be used for the investment in art. Investing in art in many ways seems out of reach for many who do not have extensive expendable income. The tokenization of art sales has similar benefits like the tokenization of Real estate investments. This enables a new accessible means to the world of art investments, making art investment opportunities open to more people and strengthening the art community as a whole. This could be applied to all types of artwork, from visual art to music etc.

Private Equity Placement / Start-Up Capital Formation

According to the responses of 109 executives active in blockchain and fintech, private equity placement and equity raising for startups represent the best application for security tokens within financial services. Imagine the complete tokenization of the startup investment process. Anyone could be able to purchase a small portion of a company and have an ownership stake through the purchase of security tokens associated with that company. Securitization of cash flows and private debt placement are also considered to be some of the best applications for security tokens in financial services.

Digital Ownership Can Be Programmed

Another benefit of tokenizing securities is that digital ownership can be programmed. Accountants and bankers were often required to enforce financial services like dividend payments, distributions, vesting periods, and shareholder voting, and now these processes can be automated through code within the security token.

Changes Are Coming To Financial Services

As the digitization of financial services continues globally, it is clear that security tokens will play a role in this change. Security tokens provide another opportunity for the industry to utilize core innovations in financial technology that allow for increased access, enhanced security, and information sharing via blockchain based protocols and features.

We hope you learned something from our security tokens series and are excited about how the development of security tokens will impact investments in real tradable assets. More to come!

Comments and questions? Send the team an email here: info@konstellation.tech

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