Tokenized securities are when the ownership of a security is materialized through the issuance of a token.
What Are Tokenized Securities?
Tokenized securities are when the ownership of a security is materialized through the issuance of a token that is registered on a distributed ledger technology (DLT) infrastructure of blockchain. A tokenized security can be equity, a bond or an investment fund.
Tokenization is the process of converting ownership rights to an asset into a token. A tokenized security is essentially this blockchain-based tradable financial asset that can represent an investment in another asset.
A security is a negotiable financial asset that holds some type of value and can be broken down into different types. You have equity, which is an investment in common or preferred stock that is issued by another company. Then, you have debt, which represents money that has been borrowed and needs to be repaid. You also have investment funds, which are pools of capital that belong to numerous investors and are used to collectively purchase a security or an asset, with each investor retaining their individual percentage of ownership.
Discussing tokenized securities even further, they can also represent ownership in assets that are liquid, such as real estate and fine art. These tokens can then be traded easily which reduces the barriers of entry into the markets.
A token that actually represents ownership rights can be subdivided as well as traded with a record of all of the trades and ownership stored on a blockchain system. The distributed ledger technology, which is developed for cryptocurrencies, replaces the third-party recordkeepers. Blockchain technology runs complex algorithms in order to actually maintain the ledger of transactions and verify ownership. Through blockchain, these aforementioned tokens are created through security token offerings and are backed by tangible securities, while cryptocurrencies are regulated in the jurisdiction in which they are offered.