How do security tokens work: Architecture
Prologue: This article is the second in a series of articles in which we will detail out
- Security tokens: An introduction
- How do security tokens work: Architecture
- Why security tokens are powerful
- What is Konkrete and how you can participate
- Why tackle real estate first
- A global real estate backed asset currency
Decades ago before the advent of internet shares were represented in the form of paper certificates.
With the online era we now have centralized online share registries where any one who is a shareholder can query their balance.
The distributed share registry takes the same concept to the next level by effectively giving every investor a copy of the share registry and these copies are maintained in sync using the distributed ledger technology.
A security token is fundamentally just a share (or a unit where relevant). More accurately it is the balance (or unspent transaction output if we want to really get technical) of shares as represented on the distributed registry.
The process of so called tokenisation is in reality nothing more than recording the share balances on the distributed registry. Security tokens is more of a marketing term more widely used. But the accurate description would be building a KYC complete distributed share registry platform.
Note that tokenisation in effect would be a two step process.
The first step being issuing appropriate disclosure documents that would allow the security to be offered to the relevant investors. That might be a private IM, or a Prospectus or an OIS or a PDS etc as relevant.
The next step is to maintain the share or unit balances on the distributed registry (or so called tokenisation).
Security tokens are really nothing but securities and each offering would go through their own disclosure document process.
How the shares are represented, whether on paper or online centralized registries or on the distributed registry, makes no difference from a compliance stand point and does not require any new regulatory attention or laws. Current laws around security offerings would apply.
Every offer that uses such a distributed registry will lodge its own disclosure docs with ASIC or if used internationally then with their local regulators as required.
Any investor who wants to hold these security tokens will only be able to hold them in wallets which are KYC complete (that being a legal requirement for holding securities).
So instead of bitcoin your balance now represents actual securities and the token generation would happen and according to the terms defined in the offer document.
Companies and funds with unlisted public offerings would want to use the distributed registry technology to streamline their operations, gain wider investor reach while reducing admin costs.
Why such a distributed registry is such a big deal compared to the plain old central registries?
We will discuss that in the next article.
