What’s in a name? Quite a bit, when it comes to investing.
As the market for digitally formatted securities continues to grow, participants and observers are bandying around terms like “security token,” “digital security” and “crypto asset” to describe what’s happening in the space. That litany of descriptions can be confusing for both investors and issuers as they consider opportunities across the market.At Openfinance, we use the term “digitally formatted securities” to describe the assets available on our platform, since we believe it’s the most accurate descriptor of this new investment format. Here, we explain common phrases in use across the industry and what they all mean.
- Digitally Formatted Securities: A digitally formatted security is a digital representation of a private and non-listed security, including real estate, venture capital, private equity, natural resources and even rare artwork. The underlying securities are familiar to anyone who’s participated in the private securities market, while the digital format makes them vastly easier to list, buy and sell with other market participants around the world. As securities, these assets are regulated by the Securities and Exchange Commission, so investors and issuers can feel confident they’re in compliance. The phrase “digitally formatted” also makes it clear that these assets are merely a new investment format – not an entirely new asset class.
- Digital Securities: Often used interchangeably with “digitally formatted securities,” this phrase also refers to private and non-listed assets that have been digitized. The phrase is picking up steam across the industry, with outlets like Forbes reporting that “digital securities … could be some of the safest and best ways to own a security.” While the two terms are largely synonymous, Openfinance believes using “digitally formatted securities” helps make it crystal-clear that these securities are simply a digital version of the same assets people have invested in for decades.
- Security Token: Tokenizing a security is one type of digitization – distinguished by the use of blockchain as its underlying technology. Think of these assets like Russian nesting dolls: while all security tokens are digitally formatted securities, digitally formatted securities don’t necessarily have to be security tokens. Not to be confused with utility tokens or other blockchain-based assets common in the crypto market, security tokens are fully regulated assets. They offer the efficiencies of digitally formatted securities, while adding the technical capabilities of blockchain for transfer management and recordkeeping. The security token market is poised for significant growth, with consulting firm Opimas estimating that the market’s value will grow to $19 billion by 2022. While most of the digitally formatted securities currently in the market are security tokens, including the assets on Openfinance, digitization may continue to develop in a variety of directions over the coming years as technology evolves.
- Digital Assets: A much broader term, digital assets include investments that are not securities, like cryptocurrencies, utility tokens and initial coin offerings. Since these investments are not necessarily regulated by the Securities and Exchange Commission, participating in these markets can potentially leave investors and issuers vulnerable to bad actors and compliance risks.
Defining a New Market
As the digitally formatted securities market takes shape, it’s important for investors and issuers to understand the differences in the investments available to them. Staying educated on the latest formats and innovations can help market participants seize new opportunities with confidence.