Blockchain is the digital, public ledger where cryptocurrencies occur. Through a blockchain, everyone in the network can see every account balance. Every transaction includes a file with a sender, recipient public key, and the number of coins involved in the transaction. The transaction is sent with a private key by the sender in the form of cryptography.

Most of the news surrounding blockchain is attached to cryptocurrency, but there is more to blockchain than just cryptocurrency. It is fairly agreed upon that blockchain will grow beyond just crypto. Big banks have been making deals with major technology companies and even small startups to develop ways for blockchain to work for them. One of the latest trends of blockchain, and one that many believe is going to grow significantly this year, is the tokenization of assets.

Tokenization works by taking an asset and converting the rights of a hard asset into a digital token. There are many different kinds of tokens, such as utility tokens, but the tokens that will be discussed here are security tokens. More specifically, we will focus on tokenized stocks.

However you choose to identify these digital coins, tokenized securities, stocks, or equity is changing how we trade forever. Today there are $256 trillion dollars in real-world assets, most of which are represented by paper. With blockchain technology and tokenization, ownership of these assets are moving to a digital world, which many experts are predicting will move many illiquid assets to liquid market places.

Security Tokens

A security token is a kind of token that does not need a utility. Instead of giving investors a tangible benefit, this kind of token usually represents a share in the company that issues it. Also known as equity tokens, security tokens are compared to purchasing shares on the traditional stock market as it offers partial ownership of a company.

While the differences between the two don’t seem to be vast, as you will see below, security tokens are much more heavily regulated, at least in the US government.

Security tokens offer users a quicker and easier transaction, with the benefits of blockchain technology, and strong legal protection. They are a digitized conventional security that many investors are already purchasing, including stocks, bonds, property, and so on. When an individual purchases a security token, they are investing in an underlying asset, traded on global marketplaces that can represent fractional ownership of the asset.  This gives security tokens a level of liquidity that wouldn’t be feasible with traditional securities.

The tokens are equipped with smart contracts, simple programs that are designed to execute as soon as a criterion is satisfied. The smart contracts can determine how the token is purchased, traded, or sold. Additionally, since tokens are based on blockchain, transactions are immutable, traceable, and transparent.

Tokenization of Stocks

As blockchain grows in popularity, more businesses are finding it convenient to convert their equity shares to digital tokens. Tokenizing is an easy way to raise capital that a business can issue shares of via digital assets, such as a cryptocoin or token.

Tokenized equity can be thought of like any share purchased in a listed company. The only difference is that they are in the form of a digital token rather than physical paper. When a buyer purchases a share in its IPO phase or on the stock exchange, the share is credited to their demat account. When purchasing a stock token, the digital coin or token is being credited to their blockchain-hosted account rather than their demat account.

There are several obstacles that one can face in the traditional ways of raising capital for a business. Regular maintenance of books and accounts, ensuring the company is adhering to the strict rules of the stock exchange, challenges faced by business owners, or a bank’s reluctance to issue credit can all get in the way.

Equity shares on a blockchain by tokenizing business ownership, on the other hand, is much more flexible when it comes to raising funds. It is a more democratic, low cost, and allows for direct participation of interested investors.

How to Purchase Tokenized Stocks

Investors purchase tokenized stocks through security token offering. It is a similar process to that of a cryptocurrency, purchased through ICO, without the bad reputation.

For those who may be worried about a security token’s relationship to an ICO or cryptocurrency, there is a major difference.

Initial Coin Offering, or ICO, is like an IPO for cryptocurrency. When a new digital currency is developed, money is needed to fund it. Those who invest are hoping the currency will gain a lot of traction and raise the price of the coin. Unlike IPOs, investing in an ICO cannot gain you ownership stake of the company. During the ICO phase of a cryptocurrency’s life, interested investors buy some of the coins with virtual currency. The coins are known as tokens and act similarly to shares of a company when they are sold during the Initial Public Offering (IPO) step.

Unfortunately, many eager investors learned the hard way that many ICOs were fraudulent. With the added security and regulation of a security token, investors can rest easy knowing that Security Token Offerings aren’t the same as cryptocurrencies, nor are they related to ICOs.

An individual who is comfortable purchasing a traditional security will be comfortable purchasing a security token. As stated above, a security token is simply a digitized version of a traditional security, replacing a stock certificate with a digital copy.

Fintech and You

The shift we are seeing is that of a digital age. Tech-savvy individuals are seeking easy access, convenience, efficiency, and speed in every part of their lives, including their finances. Having the ability to make transactions from the convenience of a phone or other electronic platform is what is creating this strong push towards