How to Gain Exposure to Security Tokens as a Retail Investor
The nomenclature for digital assets is becoming increasingly complex. There are payment coins (cryptocurrencies) designed specifically for value storage and transfer, utility tokens that give its holders access to services provided by a blockchain project or company, and now even reputation tokens, given as a marker of reputation or as rewards. However, one token class that is rapidly gaining popularity is the security or equity token, which represents physical assets, companies, or even earnings streams.
“Security coins are financial products. These are tokenized funds, tokenized real estate, tokenized commodities. These are tokens that literally represent ownership in a real asset.”
While utility tokens, which make up the majority of tokens, are defined as something that gives access to the company’s services, they do not promise to bring profits. In contrast, security tokens are designed to be tradable assets and are issued to investors in the pursuit of future profits.
Security tokens are gaining a fair amount of attention from smart-money, as well. Anthony Pompliano, a well-known venture capitalist and tokenization-advocate, made the decision earlier this year to forego his firm’s traditional investment model to build a $500 million dollar crypto fund with Morgan Creek to invest exclusively in security tokens.
More recently, JPMorgan (JPM) announced that it has demonstrated a prototype of its blockchain-based platform for capital markets. Essentially, JPM is looking to streamline capital markets transactions by tokenizing assets, which will ultimately work to improve the flow of value between many different types of stakeholders.
Every current security is going to become “digitized” via security token.
The utility market is 9 years old, only $400B and shrinking. Security market will be in trillions within 3 years.
Not even close.
— Pomp 🌪 (@APompliano) May 16, 2018
Even major publicly traded companies are beginning to identify the underlying value in security tokens. Online retailer Overstock is backing tZERO, a company that is currently holding a private ICO to fund the development of a licensed security token trading platform. The tZERO tokens, which will pay quarterly dividends derived from the profits of the tZERO platform, will be issued in accordance with SEC. KODAKCoin, the cryptocurrency created by Kodak, will be the first third-party cryptocurrency to be listed on tZERO’s securities token platform.
With so much happening behind the scenes, security tokens represent a relatively undervalued asset class. However, given the extra regulation attached to these tokens, it can be difficult for the average retail investor to participate in these investment opportunities.
That being said, here are a few direct and indirect ways to gain exposure to security tokens.
Polymath (POLY) | $0.87 | $240M Mkt Cap
Polymath is a new platform that opens up the blockchain to legally compliant securities offerings with a network of services designed to lower associated transaction costs over time. Powered by the blockchain and smart contract technology, Polymath and its unique Security Token Standard Protocol (ST-20) enables securities issuers to create digital tokens to represent shares and other instruments relating to traditional financial assets like private equity, stocks, debentures, commodities, VC funds, real estate, royalties, and insurance. (more)
BnkToTheFuture (BFT) | $0.22 | $136M Mkt Cap
BnkToTheFuture is a global online investment platform that allows qualifying investors to invest in financial innovation including FinTech (Financial Technology) companies, funds and other new alternative financial products. BnkToTheFuture has a goal to incorporate blockchain technology to allow for the trading of security tokens in 2018.
Nexo (NEXO) | $0.20 | $110M Mkt Cap
Nexo enables crypto investors to leverage the value of their digital assets without needing to liquidate holdings. Nexo is the first blockchain project to enable zero-fee, instant cryptocurrency-backed loans, while its token is the world’s first SEC-compliant dividend-paying (30% of the company’s net profits), asset-backed security token with utility features.
Furthermore, Nexo is building off a successful private token pre-sale, which was oversubscribed 11 times over, hitting its hard cap of $52.5 million in less than two weeks. According to its website, Nexo has already received more than $1 billion in requests for crypto-backed loans. (more)
Rock GBX (RKT) | $0.17 | $52M Mkt Cap
The Gibraltar Blockchain Exchange aims to be a world-leading institutional-grade token sale platform and cryptocurrency exchange. Gibraltar Stock Exchange is applying for a special extension of its license to allow it to list security tokens, in addition to its existing permissions for more regular types of securities.
RKT is the utility token for the GBX digital asset exchange and token sale platform.
Bankex (BKX) | $0.32 | $23M Mkt Cap
BANKEX is Bank-as-a-Service on the blockchain, building the Proof-of-Asset Protocol, a standard that enables new generation of assets and contracts called decentralized capital markets.
BKX token is utilized inside the BANKEX ecosystem to fuel and develop BANKEX products.
Once an investor sorts through the ever-expanding token nomenclature, it becomes clear that security tokens represent one of the more interesting investment opportunities of 2018. However, given regulatory limitations, it can be difficult for the average retail investor to build portfolio exposure to this asset class. While the options detailed above offer some interesting starting points, there will likely be an exponential increase in additional opportunities in the coming year.
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Disclaimer: The author(s) of this article may have a position in one or more of the securities mentioned above. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.