What are tokenized securities?
A tokenized security (security token) is a coupon (token) that represents and gives rights of ownership over a virtual security. For instance, by the purchase of tokenized shares the holder acquires the same rights as by the acquisition of shares listed on a regulated market. The main difference is in the underlying technology of the tokenized security structure, namely the blockchain, which makes the security available only in digital form.
These tokens are not regarded as securities in conventional sense; however, if the security token classifies as a transferable security/financial instrument within the meaning of the Financial Instrument Market Law (FIML), then it is subject to the existing regulation.
How does it work?
As with the initial share issuance, when the initial public offering (IPO) is made, as well as when issuing new tokenized securities, the security token offering (STO) is made to raise public funds.
The security token offering is based on the blockchain technology, resulting in creating digital blockchain token.
What are the benefits?
For asset owners, the public security token offering opens up opportunities to trade their assets online, taking advantage of a blockchain to raise funds and increase asset liquidity. The security token offering enables the asset owner to make its illiquid tangible and intangible assets transferable by increasing their liquidity.
The security token offering allows to flexibly divide illiquid assets into smaller tradeable parts in the form of tokens, enabling the issuers to raise funds, while the investors – to invest in projects.
Traditionally, investors could mostly invest funds in companies by buying its shares or bonds. The security token offering opens up opportunities to offer a wider range of assets to potential investors.
Regulation subdivided by type
If tokenized securities may be identified by the type of investment, they are qualified as transferable securities/financial instruments (within the meaning of the Financial Instrument Market Law).
Equity securities - Section 1 (1), Clause 30 (a) of the FIML
Virtual assets that grant a right to capital shares (or shares) in an issuer's company with the right to receive dividends or with a right of claim on the share of the earnings or income of the issuer with or without the participation right in management of the company.
Debt securities - Section 1 (1), Clause 30 (b), Clause 43 of the FIML
Virtual assets that grant a right to claim on repayable funds with or without previously established return on the invested funds and with or without the participation right in management of the company.
Other transferable securities - Section 1 (1), Clause 30 (c) of the FIML
Virtual assets that grant a right to acquire or dispose of capital or debt securities or which provide for settlement in means of payment (cash or contractual means of payment) determined by securities, currency, profitability, commodities, index or ratio.
Structured finance products – Section 1 (1), Clause 88 of the FIML, Regulation No 600/2014, Article 2(28)
Virtual assets created to transfer credit risk associated with a financial asset or a pool of financial assets, which entitles the security holder to receive regular payments that depend on the cash flow from the underlying assets.
Derivative financial instruments – Section 3 (2), Clauses 4–11 of the FIML
Virtual assets, which by their economic nature correspond to the financial instruments described in Section 3 (2), Clauses 4–11 of the FIML.
The organizer of security token offering or a person who publicly raises funds from investors may be considered to be an issuer in accordance with the requirements of the FIML. If it is planned to raise funds up to one million euro, the issuer does not have to inform the FCMC; if it is planned to raise funds from one million to eight million euro, the issuer must submit to the FCMC an offering document; if the funds raised could exceed eight million euro over a year, the issuer must submit a prospectus.
If a token issued by the organizer of security token offering qualifies as a transferable security or a derivative financial instrument, the following services:
- reception and transmission of orders in relation to financial instruments,
- execution of orders on behalf of clients,
- execution of orders in its own name,
- portfolio management,
- investment advice,
- initial placing of financial instruments,
- organization of multilateral trading and organized trading system
should be regarded as the provision of investment services, the organization of which is entitled to be performed by the investment service provider (for example, a credit institution or investment firm). Correspondingly, it should be assessed whether ancillary investment services are offered and provided, the provision of which also require appropriate authorisation.