Issues related regulatory alignment, volatility in the prices of securities and determination of value assets can be solved by Asset Tokenization through development of smart contracts, Security Token Offering and incorporation of volatility in asset’s price.
Regulatory alignment is an issue especially since blockchains are decentralized. Security tokens are heavily regulated with respect to the jurisdiction they are traded in – Specially when it comes to international trading. If the blockchain is implemented for token trading, it will be difficult to establish relevant laws to regulate this market.
Security is a major concern in traditional financial structures as a security breach could result in complete loss of data as the data rests in the hands of the third party.
There exists a certain degree of volatility in the prices of securities in the international market, the impact of which is significantly reflected in the prices of the underlying assets. There does not exist a particular framework for incorporation of such volatility in the valuation of the tokens that are represented by the underlying assets.
An Initial Public Offering (IPO) requires extensive procedures such as subscription, hiring of the underwriter as well as numerous bureaucratic processes. Also, it makes it difficult for institutional investors to get a return on their investments because it fails to provide liquidity for investors if they wish to divest their money to capture the capital gains on their equity.
The regulatory requirements can be solved by embedding compliance terms at the token level by creating smart contracts that fulfil the Know Your Customer (KYC), Anti Money Laundering (AML) and other relevant regulations.
Assets that are stored at a bank physically are generally insured. The tokens can be made in a way so as to ensure that an insurance claim is automatically launched if the underlying conditions to make such a claim have been met. A smart contract will launch the insurance claim and thereby automatically update the value of the token incorporating the success of failure of the insurance claim made with the insurance company.
A peer to peer network allows the incorporation of volatility in prices of underlying assets in a way that the token values are automatically updated when a change in the value of the underlying asset occurs.
A security token offering (STO) has significant structural differences as compared with traditional fundraising methods and offers various advantages. Firstly, the global reach of the tokens provides significant opportunity to get global funding. Although this may bring regulatory challenges, they can be catered to across the blockchain through smart contracts.
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