By Move over ICO’s, there’s a new sheriff in town. Security token offerings (STOs) are all the rage these days. If you have been involved in the crypto space there is a high probability you have encountered the term STO. Not sure what exactly it means? Don’t worry. Read on to find out more.
What they are?
A Security Token Offering (STO) is a representation of digital tokens which are sold as securities. These securities form the basis of an investment contract into an underlying asset such as stocks, bonds, and real estate. In the United States, to determine whether or not an investment is a security, the Howey Test is used. The test states an investment contract is a security when:
- There’s an investment of money.
- There’s an expectation of profits from the investment.
- The investment of money in a common enterprise.
- Any profit comes from the efforts of the promoter or third party.
These security tokens are stored on the blockchain, which allows the ownership details to be authenticated and recorded. Through the use of blockchain technology and security token offerings, the real estate industry is being heavily impacted. In the following sections, we will see exactly how STOs benefit real estate owners, retail investors and regulators.
Advantages of Security Token Offerings in the realm of Real Estate
Real estate is traditionally an extremely illiquid asset. This means that it cannot be readily converted into cash, which is the most liquid asset. For owners of real estate who wish to invest in developing their assets further, financing options are generally limited to financial institutions such as banks for loans, in order to raise the liquidity necessary to carry out a project.
However, the introduction of STOs for real estate would allow owners to bypass traditional financial institutions in favor of direct financing from a wider base of investors. A real estate owner could sell the security token as an investment, allowing them to unlock the liquidity traditionally trapped in a highly illiquid asset.
Real estate owners may be able to enjoy inflows of liquidity from international markets as well. Traditionally, receiving financing is limited to the country in which a real estate owner is located. However, a blockchain is a distributed system that flows seamlessly across international boundaries and borders. It may be possible in the future for real estate owners to generate liquidity for their real estate assets from international sources, due to the distributed nature of blockchain technology.
Security Token Offerings: Retail Investors
Retail is a highly coveted investment opportunity for individuals around the world. However, the real estate asset class has traditionally had many barriers to entry for average investors. A large deposit in an area of increasing real estate prices, for example, excludes many would-be investors from investing in real estate.
Due to the high capital costs required, a large percentage of investors cannot access the real estate market. STOs represent the democratization of asset classes that have traditionally been inaccessible for retail investors. As STOs become more widely accepted, it may be possible for investors with a low net worth to allocate a portion of their investment portfolio by purchasing a small fraction of the security tokens issued for a real estate asset. In this scenario, STOs would provide the gateway to an asset class that many retail investors would normally have no access to.
Security Token Offerings: Regulators
Securities have a long and established precedence with regulators, particularly in the United States. This existing framework for security offerings provides a neat framework in which STOs may operate. This framework would allow existing securities rules and regulations to be applied directly to STOs.
A security also creates accountability for the issuer. This accountability means that the seller of the security has a fiduciary responsibility with investors’ finances to act to the best of their ability with investors’ money. Security laws have existed for decades, so regulators and sellers of security tokens benefit from the clear laws governing securities. These laws are designed to protect investors from fraudulent investments and to hold project managers accountable.
International Examples of Security Token Offerings
An example of an STO revolutionizing the real estate industry in Switzerland is Blockimmo. Their regulatory-friendly platform enables fractional property investments and ownership. Properties listed on the Blockimmo platform are legally represented as security tokens on the Ethereum blockchain. Their partnership with financial institutions allows Blockimmo to grow the cross-border market.
Operating out of Switzerland, this company is focusing on allowing an accessible and streamlined real estate market, while adding value to users at the same time. The goal of the company is to make the global real estate market more efficient than the current stock market.
Blockimmo offers all investors a Real Estate security token which is solid, legal and practical. This token operates within a legal framework set-out by financial market regulators. Blockimmo offers a simple, robust platform. They want to bridge the gap between blockchain and everyday users.
Conclusion
It is clear that blockchain technology will result in a much different future for the real estate industry. Through the tokenization and sale of assets representing real estate, investors have access to an asset class that could have been previously inaccessible to them.
Through the sale of real estate, STOs can help fund development projects, access international investors and provide a clear regulatory framework. It is clear that STOs have the potential to cut out middle-men in the buying and selling of real estate. Blockchain based tokens can be traded on a peer-to-peer basis, meaning that anyone can transact without the need of a trusted third party. This can be seen in the trading of Bitcoin, as anyone can send Bitcoin anywhere in the world without needing a bank or financial institution to verify the transaction.
Finally, we have seen that STOs have been adopted within a clear regulatory framework in Switzerland. This could provide the blueprint for other countries to follow. In conclusion, Security Token Offerings have the ability to totally revolutionize the real estate industry as we currently know it.
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