In this blog post, InvestaX will walk you through the following key aspects of security tokens and security token offerings (STOs), breaking down:

• What are security tokens and how do they differ from Cryptocurrencies?
• Understanding STOs
• The building blocks of an STO
• Terminology Dilemma: Are RWA Tokens the New Security Tokens?

By the end, you’ll have a solid grasp of the unique characteristics and implications of security tokens and security token offerings, as well as an understanding of the factors that distinguish them from their counterparts. 

TLDR - A security token is a digital asset representing ownership or rights to real-world assets, while an STO is the initial sale of these tokens. In some jurisdictions, people use the terms security tokens and RWA tokens interchangeably.  

Ready to explore? Let’s dive in!

What is a Security Token?

A security token is a digital asset that represents ownership or other rights of real-world assets such as real estate, funds, bonds, and stocks. Security tokens are designed to comply with existing securities laws and regulations, and are subject to regulatory oversight.

Security tokens are a subset of digital assets. Digital assets is an over-encompassing term that covers cryptocurrencies, stablecoins, digital securities, and all types of digital tokens, whereas digital securities is a subset of digital assets. Digital securities, in turn, cover security tokens and tokenized securities. 

Example of a security token - IXAPE:

• Project Name: Tokenized Bored Ape #2371
• Security Token (Ticker Name): IXAPE
• Underlying RWA: Bored Ape #2371 NFT
• About the RWA: Bored Ape #2371 is a part of the sought-after blue-chip NFT collection known as the Bored Ape Yacht Club (BAYC).
• What was tokenized: Economic interest in the underlying RWA

More information on the IXAPE token can be found here.

Decoding Digital Assets: Security Tokens vs. Cryptocurrencies

Cryptocurrencies, on the other hand, are digital assets that are designed to function as a medium of exchange, store of value, or unit of account. They are not tied to any underlying asset and their value is largely determined by market demand. 

Overall,  security tokens and cryptocurrencies have different purposes and characteristics. For investors, consideration of investment goals and risk tolerance is essential when choosing between security tokens and cryptocurrencies.

Cryptocurrencies are, for the most part, not subject to the same regulatory oversight as security tokens, and their legal status varies by jurisdiction. While cryptocurrencies can be used for speculative trading or as an alternative form of payment, they arguably do not offer the same level of investor protection or regulatory compliance as security tokens.

Security tokens provide investors with a way to invest in a more secure, efficient, and accessible way. They offer the potential for increased liquidity, lower transaction costs, and greater transparency than traditional securities.

Understanding Security Token Offerings (STOs)

STOs are the initial sale of new security tokens by a company to an investor class. Through this process, a company can directly raise capital from investors, which can be used for various purposes such as expanding operations, paying off debt, or funding new projects. 

Unlike cryptocurrencies, which are known for their high risk and potential high returns, STOs are quite the opposite since they are backed by real-world assets. The performance of an STO depends on factors like the terms of the investment, the risk-reward profile, and the underlying asset (such as venture capital, private equity, shares in a startup, or a real estate fund).

The Building Blocks of a Security Token Offering

The foundation of any STO is built upon these components.

• An Underlying Asset: The physical or real world digital asset that is being tokenized into security tokens.
• Security Token: A digital representation of the asset on the blockchain.
• Tokenization: The process of transforming ownership rights or economic rights in a real-world asset into digital tokens. 
• Tokenization Platform: The technology and infrastructure responsible for transforming ownership rights or economic rights in a real-world asset into security tokens - a process called "tokenization." The tokenization platform also manages and administers the security tokens. Examples include InvestaX's tokenization SaaS platform and IX Swap’s tokenization SaaS platform.
• Smart Contracts: Smart contracts automate many aspects of STOs, such as token issuance, ownership transfers, and dividend distribution.
• Regulated securities marketplace: The platform where STOs are conducted. The example includes InvestaX’s Singapore-regulated marketplace that operates under a Recognized Market Operator (RMO) License granted by The Monetary Authority of Singapore (MAS).
• Blockchain: The decentralized ledger where security tokens are stored and transactions are recorded, ensuring that the tokens are decentralized, transparent, and secure. Examples include Ethereum, Kaia, Stellar, and Polygon.‍
• Digital Wallet: A tool for investors to store and manage security tokens they purchase. Examples include Metamask and Coinbase Web3 Wallet.

Examples of security token offerings

1. Commodity-backed Trade Portfolio

The issuer, TradeFlow is a Fintech-powered commodity trade fund manager, founded in 2016 in Singapore, multi-year track record with stable returns, low volatility and zero defaults. Tradeflow has tokenized its commodity finance fund and conducts its security token offering on InvestaX’s and Obligate’s regulated platforms. 

About The Tokenized Fund

Tradeflow is a commodity finance fund with a successful multi-year track record and AuM of around USD 100 million. It invests in pre-booked insured physical commodity finance transactions with a max tenor of 90 days. 

More details of the security token offering of TradeFlow’s commodity finance fund can be found here.

2. Les Constructeurs du Bois Corporate Bond

The issuer - Les Constructeurs du Bois - is an eco-friendly real estate company offering a global range of timber construction services. They have tokenized their corporate bond eNote™ and conduct their security token offering through Obligate’s and InvestaX’s regulated platforms.

About The Tokenized Corporate Bond

The eNote™ provides investors with a new ESG-themed corporate bond investment opportunity. Concurrently, it finances the company’s organic growth and supports working capital for new ecological real estate projects, which utilize bio-sourced materials and local supply.

More details of the security token offering of the corporate bond can be found here. 

Terminology Dilemma: Are RWA Tokens the New Security Tokens?

By 2023, the tokenization momentum surged as infrastructure became ready for end-to-end issuance. Another significant event was the decentralized finance (DeFi) meltdown in 2022/2023, which left crypto investors without yields. This led to the emergence of tokenized treasury bills offering high yields. Consequently, holders of crypto, particularly stablecoins like USDC, began investing in T-bill STOs. 

The DeFi industry responded by coining the term "RWA" (Real-World Asset) tokens. Although traditional finance (TradFi) knows “RWA” to mean risk-weighted asset, the DeFi industry now uses "RWA" to describe security tokens or asset-backed tokens. The explosion of new term RWA tokens in the market essentially just refers to a broader class of assets that are tokenized which includes structured products, money market funds, tokenized derivatives, and more. 

So in that sense, whilst it is crucial to note that not all RWA tokens are securities (Explore more on RWA Tokenization here). The terms "RWA" and "STO" are often used interchangeably in the DeFi space, making their distinction less significant in casual conversation - rightfully so. What truly matters is their common significance within this realm - the seismic shift aiming to catapult tangible assets into the digital realm through the power of blockchain.

InvestaX: Your Gateway to Unlock Global Markets with STOs

At InvestaX, we offer a comprehensive tokenization platform for Security Token Offerings (STOs). Our services include advanced tokenization technology and access to our regulated marketplace in Singapore, enabling companies and asset managers to issue security tokens and conduct STOs for a global investor base.

Contact us today to discuss your Security Token Offering strategies.