A security token is a bustling product in the ambience of cryptocurrency. Now, almost every one of us is aware of this conspicuous product. It is getting fame not only from media, tech people but from the tech-savvy investors as well; who are looking for the upcoming slayer application on the blockchain.

But is it so easy for this security token to get a breakthrough?

Is it very easy to create and use these tokens ?

Probably No.!

So, are we aware with the challenges that come to the way of security tokens? Let’s go through this article to get plugged-in about the unsolved challenges of crypto security tokens.

1. Rules to transfer a token from a person X to person Y

As in the case of bitcoins, what is needed is sending it the address of another person. The same is the case with utility token. But in case of security tokens, we need to have verifications in the place like KYC/KYB (Know your Customer/Business), age, place of residence, etc.

In utility tokens wherein transactions are generally failed due to lack of funds, but in case of security tokens reasons of failure could be many like a receiver not eligible, token restriction, etc.

Let us see an example – a child aged 11 years is not eligible to buy securities in some jurisdictions. What if the system is not confined to specific geographic location, open-source and resistant to censorship by design ?

Suppose, shares of company B are to be transferred to another person, it gets registered in the central database. In case of a decentralized database, this information is flipped on the top of the head.

2. Handling of deposits and withdrawals by exchanges

Though trading of security token on an exchange is easy, upon successful completion of verification checks. But, do we know the manner of onboarding these to exchange and withdrawal from an exchange. Generally, participants of the crypto world like to remain in control of their own private keys.

But here the logic is – No keys, no money ! So, it is not preferable to store a token on the exchange where one does not control private key, due to lack of transparency. Furthermore, exchanges till reaching lots and lots of cryptocurrency coming up and most of them are themselves knowing the requirement for listing tokens.

3. Against whom a token holder can raise claims ?

This is yet another challenge to find a person to whom a holder of security token can approach, in case any issues are faced like the performance of security token is not as per plans, buyer feels that he has been charged more by the token seller, etc. The answer to this question is simple if the token is being purchased from a company during STO, as the token buyer can approach the company.

But what if the token is purchased from the secondary market platform ? If the things do not go as it should, or issues come in the way, who will be liable?

The company, perhaps not!

It might be the exchange or another party in case of OTC trade.

In an unregulated utility token market, answering these questions is easy, they were unregulated. There are no such rules or things defined. These tokens are there to serve utility and there is no expectation of return from such tokens. So, as such no claim arises there off. There is no insider trading as well.

Even then if any problem arises, the only party that can be approached is the exchange; it may or may not help.But in the case of security markets, there are higher chances of arising of claims, they being the product of regulated environment, wherein rules are defined as when to trade, what to trade, etc.

So, how could this apply to security tokens ?

The issue arises as people want certainty with freedom, which is like two ends of a rope. Here, the questions so come up are subjective in nature. There is no sure shot answer for the questions. There is no yes-no, or right-wrong answer like while entrusting the responsibility in case of facing issues, it could be the seller, the exchange or the company. Such issues are still unsolved.

4. Reporting requirements as a Security Token Issuer

This is the issue for the companies offering STO. What are the reporting measures that it has to undertake?

In stock markets, reporting is completely standardized and is being done on a quarterly basis. But in crypto world, it is pretty much non-existent. Reason being, reporting is not needed in case of utility tokens and not rules are defined in this regards in case of security tokens.

Though reporting can be helpful in many ways, like informing the public about financials, challenges, etc. thereby bringing transparency; only a few companies do report even when the deal in billions.However, it would be good to define rules for reporting as it will bring transparency for investors, but some mature companies might not like it, being not used to it.

Also, it might make things difficult for start-ups, they being new to the business.But there are some questions which are unanswered like - what all things should be included in the report, what should be the length of the report, would it be feasible for all ages of companies, and reporting time-frame.

5. Is there any legal connection between token and underlying asset ?

Another issue comes when deciding the connection between token and underlying asset. It is not easy to define ownership as it is generally thought off. In the case of real estate, ownership is having the title of the property in own name, in gold, it is in physical pieces.

But how ownership can be defined incase of the blockchain?

This being the decentralized system, only provides private keys so as to enable a person to make entries. With this, in order to prove ownership, it is required to prove ownership of the key, with which it is possible to prove ownership to digital token cryptographically.

So the question arises, is it even possible to prove ownership of the key?

How would it work?

As if how it can be proved that a security token is owned by a person M, even when it is not entitled to his name. Would a regulating authority accept the litigation that will need mathematical formulas to be proved? And yes, there can be more than one person knowing about the key, then?

This is a neoteric concept, which needs extensive homework to be put into practice. It will need designing and amending of laws to make it possible. This all will depend on the court.

There is one country Liechtenstein, which is preparing Blockchain act so as to effectively deal with such difficult questions. This, once into effect, would provide the foundation of deciding a legal connection between token and underlying asset.

So, could security token be the next slayer application on blockchain ? Yes, it could be but does not seem to be any time soon as there are some questions which need to be answered.

With STO Development Company - Alwintechnologies