Some cryptocurrencies tend to be pretty volatile. Do you feel secure when you are investing your money into crypto? After all, there is that chance you might leave with nothing.
Many crypto fans use the terms “coins” and “tokens” interchangeably, thinking coins and tokens are the same thing – they’re not.
To explain, coins are unique in that they run on their own native blockchain, while tokens are projects that run on other blockchains.
There are two distinct branches within the token category: utility tokens and security tokens.
One recognizable analogy that distinguishes utility tokens and security tokens would be a casino. Within a casino setting, utility tokens would be similar to the casino chips you use while betting and gambling within the casino facility. Before you leave you would cash out any winnings you made in the form of casino chips for fiat currency.
However, if you lose all your casino chips, you leave the facility with nothing. Whereas a security token would be similar to a share in the physical casino itself. Whether gamblers win or lose – your security token still increases in value as long as the “house” wins.
Security tokens are an investment that unifies real world assets on a blockchain.
Convergence is a decentralized interchangeable asset protocol seeking to converge assets around the work on parallel blockchains. Oscar Yeung, co-founder of Convergence, says his organization not only wants to jumpstart that discussion but also drive adoption of security tokens.
In his exclusive interview with DailyCoin, he said that the gap between real world assets and the on-chain world is “a little bit murky” and that’s what the Convergence team is trying to fix.
“A security token represents a piece of ownership in a real world asset that’s codified on a blockchain. It represents an incredible opportunity to connect real world assets and on-chain assets. A security token provides real world ownership of assets in companies that you have access to right now via the securities available on a stock exchange; however, because it’s offered on a blockchain it’s a very liquid market, where it’s traded between brokers and individuals directly,”
If you’re questioning what regulatory wrangling might be involved in security tokens, which represent real-world shares in corporate assets, real estate holdings, municipal bonds, commodities or precious metals – you’re not alone. The U.S. Securities and Exchange Commission (SEC) has been wrestling with the same questions.
In fact, all security tokens require approval from the SEC before they can be traded on secondary exchanges or be included as part of a public sale to retail investors.
Security tokens are in the sites of regulators, which has slowed their adoption.
Yeung says Convergence strives to create a more transparent and compliant environment for security tokens.
“What we’re doing is creating that transparency so anyone can have access to buy [a security token], sell it or trade it any time they want. Some of the problems that we face are at the custodian level. How do we ensure that the tokens are actually backed by the real world asset and what’s the best blockchain to use? How does it all integrate and how do we make a system where everyone has visibility to track who owns what? How do we replicate that whole thing on-chain - that’s what Convergence is essentially doing,”
Yeung says his enterprise is putting the building blocks in place to help secure the future of security tokens. As part of their development pipeline, they have an investment council that ensures that everything that’s on Convergence is backed by the correct and equivalent real world asset.
“We’ll do the necessary due diligence on each project as well as ensure the accuracy and validity of the actual pegged asset - not just something that someone claims to have. From the tokenized angle, it’s very easy because everything is stored on-chain,”
On The Flipside
- The promise of security tokens as a conservative real-world asset that still has exposure to some aspects of crypto-type gains is appealing to a class of investors waiting to dip their toe into crypto.
- Security tokens have been under extreme regulatory scrutiny.
- It’s not clear if investors will accept the opportunity costs while they wait for regulatory approval of each and every project.
Watch the full interview here: