Everything you need to know about tokenized securities, from the importance of the blockchain security tokens are issued on to how to issue security tokens and trade them.
If you’re reading this article, there’s a high chance you’re interested in how to issue security tokens. Maybe you’re interested in creating a security token offering (sometimes referred to as tokenized securities or a tokenized security token offering), or maybe you’re just generally curious!
If you’re not familiar with security tokens, crypto, or other blockchain-based digital assets, the process of creating and trading tokenized securities can feel quite daunting.
Luckily, Polymesh erases much of this complexity. Its purpose-built architecture and the easy to use Polymesh SDK make security token offerings and post-trade processes incredibly simple. And with tokenization platforms such as Token Studio, you can even interact with the blockchain without code.
So, how does issuing and trading security tokens on Polymesh compare to other blockchains?
Let’s break it down!
How security tokens are created depends on the underlying blockchain– that’s why it’s so important to choose a blockchain such as Polymesh that’s built specifically for security tokens!
To illustrate this we’ll take a look at Ethereum, a general-purpose blockchain.
On Ethereum, assets are originated using programmable smart contracts: intelligent digital contracts that can be verified and enforced without a mediating third-party. For each security token created, a new smart contract is added on top of the chain.
Security token standards were introduced to make the process more efficient. Standards are essentially token protocols, or a list of security token rules that help ensure smart contracts remain compatible with existing financial regimes.
Most early tokens were created using ERC-20, a basic technical standard for fungible token implementations. The problem with ERC-20 is that it’s very simplistic and doesn’t comply with the intricate regulations (tokenized) securities are subject to.
In response, Polymath spearheaded the development of ERC-1400. ERC-1400 is an umbrella of standards containing the necessary complex features for frictionless and compliant issuance and use of tokenized securities. It streamlines token configuration, eliminates the need for technical due diligence, and makes security token offerings and other products possible by implementing features and conditions that aid in compliance.
Since ERC-1400, standards have been developed to further fulfill the necessary security and compliance requirements for SEC-approval and other regulator approval (including built-in KYC and AML for both primary and secondary markets).
As a blockchain specifically for security tokens, Polymesh takes this development a step further. Polymesh’s architecture is inspired by ERC-1400 and layers in additional capabilities around governance, identity, compliance, confidentiality, and settlement (see a full list here).
What’s more, asset origination occurs natively at the procol layer, bypassing the need to add a smart contract on top of the chain for each security token. Issuers don’t need to add additional standards to ensure their security tokens are created consistently or capable of meeting complex regulatory needs.
With Polymesh, there’s no time consuming and expensive integration process. New tokens can communicate with the ecosystem without needing to be integrated individually, unlike on Ethereum. Custodians and other service providers only need to integrate once before they can quickly onboard new assets.
With Polymesh, you don’t need to know the ins-and-outs of blockchain or code to interact with the technology.
Financial primitives are built into the chain’s core, providing functionality for features like identity and compliance without any code required. This makes it incredibly easy to configure tokens consistently in a way that’s compatible with complex regulatory requirements.
Developers familiar with basic programming languages can use the Polymesh SDK to plug right into the blockchain to issue security tokens. Meanwhile, issuers who want an easy, completely no-code approach can use a tokenization platform such as Polymath’s Token Studio.
Maybe you’re looking to offer your own tokenization products for your clients. In that case, you can even utilize the SDK to create your own tokenization workflow complete with your desired customizations and features. (Is this you? Apply for a grant!).
If any of the above left you interested in trading security tokens, you’re not alone!
The global listed trading volume of security tokens is expected to grow to over $160 trillion USD by 2030. All around the globe, technologists, market participants, and regulators are scrambling to take advantage of this shiny new form factor.
When it comes to actually trading tokenized securities, they have more in common with trading traditional securities than trading other types of tokens. That’s because (and we can’t stress this enough) security tokens are subject to stringent securities regulations.
As with traditional finance, tokenized securities can be traded on either primary or secondary markets.
A primary market is where securities are created and made publicly available for the first time. Primary market issuance is used by companies to raise funds for long-term capital– a common example is an IPO. Needless to say, this is where the initial launch of a security token offering or STO would take place.
A secondary market is where existing (tokenized) securities are traded among investors. Usually, this involves investors trading previously issued securities without the involvement of the issuing companies. Overall, secondary markets facilitate the liquidity and marketability of existing securities while protecting investors’ interests.
Exchanges are considered to be secondary markets. However, security tokens aren’t traded on regular token exchanges. Rather, tokenized securities trade on specialized exchanges that can comply with regulations, including extensive lists of security tokens, data sharing, and investor onboarding procedures.
Since Polymesh was purpose-built for security tokens, it already takes these considerations into account. Its 5 key pillars (governance, identity, compliance, confidentiality, and settlement) make Polymesh the perfect foundation layer for a tokenized exchange.
For example, Polymesh requires a verified real-world identity for every participant that is attached to their on-chain account. This prevents users from using multiple identities to subvert compliance rules and enables issuers to fulfill KYC/AML obligations. Identity on Polymesh can also be leveraged for on-chain compliance implementation and enforcement. Issuers can customize an array of compliance and rule-based characteristics at the token level according to their specific needs, to be automated without any manual intervention.
Interested in creating security tokens on Polymesh? Our developer portal has everything you need to get started, including tutorials on token configuration, instructions for using the SDK, and more.
Ready to use the chain? Visit onboarding.polymesh.network to get started!