Forget crypto. Think security tokens.
Juan Hernandez, Founder & CEO of OpenFinance Network, the first registered ATS to launch a regulated security token, believes the emergence of the blockchain-based security token is the missing variable in facilitating a new era of smart securities and much-needed liquidity in the $7 trillion alternative asset market.
Juan Hernandez, Openfinance
Hernandez took some time out of his schedule to sit down with Traders Magazine editor John D’Antona Jr. to discuss security tokens: what they are, how they are issued and traded.
Traders Magazine: Can you explain to us just what is a security token? Many are confused at what this means.
Juan Hernandez: A security token is a blockchain-based, digitally formatted security. While the underlying asset remains the same, the digital format creates a digital representation that is easier and more efficient to trade. Any type of security can be digitized, including alternative assets such as real estate, venture capital, private equity, hedge funds and real assets.
TM: How does one issue a security token?
Hernandez: Listing a digital security to trade on the OpenFinance ATS includes both technology and compliance processes. From a technological perspective, companies must use one of our approved standards. From a regulatory standpoint, any security token looking to list on our platform requires all compliance components shared by other US-regulated unregistered securities. Starting with the compliance checklist, issuers must submit all related documents regarding the offering and company details. After we have received the items, our team completes due diligence on the issuance to ensure all regulatory requirements were followed throughout the various steps in the process, such as KYC/AML and hard accreditation checks (for 506(c) exemptions). Upon approval, we can then enter into the listing agreement with the issuer.
TM: Why did you or would a firm issue a security token?
Hernandez: For decades, issuing and administering unregistered securities has been a manual, paper-intensive and inefficient process - and one virtually eliminating the prospects of a robust secondary market. With the OpenFinance platform for digital securities, sponsors and issuers can benefit from reduced costs and a more efficient secondary market, allowing for the liquidity that can lead to improved valuations.
TM: How are security tokens priced and traded? Where are they traded?
Hernandez: The issuer of the security sets the price on the initial offering. Like other traded securities, the subsequent price is ultimately set by secondary market participants, i.e. buyers and sellers. Investors can buy and sell security tokens on compliant and registered Alternative Trading Systems (ATS) like OpenFinance.
TM: What is the length of time for a trade to clear and settle?
Hernandez: OpenFinance streamlines manual processes, settling most trades within minutes, 24/7/365. This is a vast improvement on the settlement of many traditional paper-based securities, which can take up to eight weeks.
TM: Who is the target buyer for tokens? Institutional buyers or retail buyers?
Hernandez: Digital securities allow for a more efficient and liquid secondary market. This is attractive to both institutional and retail investors because they can now diversify into securities that historically have been inaccessible and illiquid.
TM: What can be done to add liquidity to this new space?
Hernandez: We have proven that private offerings can be traded in a regulated environment on-chain. Larger and more traditional issuers and sponsors of illiquid securities are taking note and have expressed interest in digitizing. Each new offering will bring more investors to the market and generate more and more volume.
TM: Is it a blockchain-based token?
Hernandez: The securities currently listed and trading on the Openfinance ATS use the ERC 20 ethereum blockchain token format.
