What Are Tokenized Securities (STOs)

A security token represents a right to a real-world asset (RWA) such as a stock, bond, piece of real estate, or intellectual property, expressed as a blockchain token.

An STO (Security Token Offering) refers to the method of publicly offering such tokenized securities. The name resembles a cryptocurrency offering (ICO), but its nature is entirely different.

An STO is, above all, a 'security,' so like existing securities it is subject to securities-law regulation (for example, the U.S. Securities Act of 1933).

The biggest difference is that it is 'within regulation.'

1. Investor verification — It goes through KYC/AML (identity and source-of-funds verification) procedures. 2. Transfer restrictions — Rules are enforced, such as allowing transfers only among approved (whitelisted) wallets. 3. Secondary market — Secondary trading takes place on regulated exchanges.

This is an attempt to keep the protections of traditional securities — disclosure and investor recourse — while taking the advantages of blockchain, such as automatic dividends and fast settlement.

Tokenized securities draw attention for making it possible to slice up and trade assets that were hard to divide, such as real estate or unlisted stocks.

But you should keep in mind that this is still an early-stage market.

1. Liquidity — 'Being a token' is no guarantee that it sells easily. If there are few counterparties, you may not be able to sell when you want. 2. Regulatory and technology risk — Rules and standards are still being developed, so there is much volatility. 3. Underlying-asset risk — The token is just a wrapper; it ultimately inherits the value and risk of the underlying asset (real estate, bonds, etc.) as is.

The format is new, but the possibility of loss on the underlying asset is no different from traditional securities.