Understanding digital securities begin with blockchain, distributed ledger technology that has revolutionized the way records and information are stored. Rather than data being stored in a central database, blockchain technology works because the data is continually appended and verified by many participants. This gives blockchain strength and security because it makes it significantly more challenging for hackers to manipulate records. If one copy were to be changed, it would be immediately be recognized as invalid by the other participants on the blockchain.
This is the technology that powers emerging financial technologies. Bitcoin is perhaps one of the most recognizable forms of blockchain technology today, with over 46 million Americans owning some of the cryptocurrency. This same technology is being applied to securities to improve upon the ways traditional securities have been managed.
Ownership is easy to record and validate through digital securities because the transaction is stored on the blockchain. This eliminates the problem of an investor losing their certificate of ownership or the company losing their records of shareholders. Since the record is unchangeable, it also serves as a risk management mechanism for companies, as the risk of a faulty or fraudulent transaction is removed. Digital securities are also incredibly beneficial to the company when preparing for any capital activity since the company’s records are transparent and readily available. With traditional securities, the company would typically hire an advisor to review all company documents. If the company has issued digital securities, this cost is eliminated, as it is already in an immutable form.
With digital securities, investors may receive “tokens,” which are registered investment vehicles and represent ownership in a company. This is often referred to as tokenization, a coin termed in 2010, but has since become less popular in favor of the term digital securities. The reason is that digital securities and digital assets became the preferred term to accurately convey the time, effort, and reliability in this form of investment.
There has also been an increase in the discussion surrounding another blockchain-based asset, NFTs. Non-fungible tokens (NFTs) are unique cryptographic assets that cannot be replicated and stored on a blockchain. However, it is essential to remember that not all digital assets meet digital security requirements. However, if an NFT can meet the digital security requirements, they can be offered through raises under exemptions like Regulation A+.
If you would like to learn more about how issuers can leverage digital securities for RegCF offerings, be sure to check out the upcoming KoreSummit event on November 18th, 2021, starting at 12 PM EST.