ICOs were a big thing in 2018, but going into 2019, ICOs have all but lost their luster. But a new kind of token is gaining attention. They are called security tokens. They are similar to an ICO token but these are backed by actual stocks or bonds. They offer many advantages over traditional stock trading and the first of its kind will be offered by a Nasdaq-powered crypto startup DX Exchange, based in Estonia. They are planning to launch security tokens of the top ten traded stocks in NASDAQ. 2019 is going to be an exciting year as more of such offerings will happen throughout the year.
Tokens, ICOs and Security tokens
A token is a representation of something in its particular ecosystem. It could be a value, stake, voting right, or anything really. How a token is issued and what it offers decides if it is an ICO or security token. Unlike cryptocurrencies, tokens can be used only in their native environment. ICOs or Initial Coin Offerings are basically the cryptocurrency version of crowdfunding. A coin has three factors that bring value to it, they are Role, Features, and Purpose. Any financial asset is considered a security only if it passes the Howey test, and since ICOs vary according to their role, feature and purpose; not all ICOs are securities with a few exceptions. A transaction is deemed as a security if it meets three conditions. First, it has to be an investment of money. Second, the investment is in a common enterprise, and third, there is an expectation of profit from the work of the promoters or the third party. If an ICO meets all the three, then it is a security token. The current security token offering from DX Exchange is limited, but in the future, a broader range of shares can be expected to be sold in this manner.
DX Exchange is a crypto startup based in Estonia backed by NASDAQ. What DX Exchange does is, it buys stocks from NASDAQ, then they issue ERC20 tokens which represent the holdings of those stocks and then they sell them on their exchange. So this will basically allow people to invest in these real-world stocks using blockchain technology and then be entitled to dividends from those stocks as normal stock owners and be able to move in and out of them easily. This is really exciting in terms of opening up more money to stock markets and more liquidy going into crypto markets as well. The trading platform under DX uses NASDAQ matching engine which gives it unparalleled performance. Fully regulated in the European Union by the EFSA, the exchange is committed to providing a transparent and ethical exchange between interested parties. DX is the first crypto exchange that allows institution and individuals a transparent and totally legal way of dealing with crypto in a real-world stock trading.
The advantage of having stocks represented as security tokens
Security tokens will offer round the clock trading. Remember that the stock markets are open only from 9 AM to 4 PM, Monday to Friday, Public holidays off etc. The crypto markets have no such breaks, it keeps trading 24 hours 365 days a year. This will yet again bring traditional financial markets into a new horizon. With all the shares tokenized, buying fractions of shares will be possible and the fractional ownership of stocks will end things like stock splits. This also means the entry barrier to small investors will be reduced since even if you can’t buy a full stock of Apple, you can easily buy fractions of the stock from DX Exchange.Tokenization of stocks means that they can be stored in any Ethereum wallet. You no longer have to trust some unknown broker. Also, the emergence of security tokens has a lot of advantages to the token market. They bring back credibility which was lost due to a lot of shady ICOs.
Overall it is a positive development in the crypto space bringing in big investors and institutions as well as bridging the gap between traditional finance and the crypto world. How investors react to these new tokens is something everyone will have to wait and watch.
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.
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