The debate about security tokens

Swiss subsidiary LL DEXX of Look Lateral, a US-based company specializing in fintech, alternative assets, and technological innovation, has announced the sale of a tokenized artwork on blockchain.

The work in question was split into one hundred thousand digital tokens and the sale has sold out in just over a week.

This opens up a debate about the future of digital asset fractionalization and the tokenization of real assets. How do these products differ from security tokens?

Let’s see it together in this article

Summary

• Look Lateral launches first artwork tokenized via blockchain technology
• Utility token vs security token
• The SEC considers all cryptocurrencies except Bitcoin to be security tokens

Look Lateral launches first artwork tokenized via blockchain technology

The transaction took place by taking as a reference a small canvas made by master Alighiero Boetti between 1973 and 1974, titled “Order and Disorder.”

The work was sold by Florentine collector and gallerist Michele Casamonti through a very unusual modus operandi: one hundred thousand digital tokens representing a fraction of the work’s ownership were created and then put up for sale through the dexx.finance platform, a blockchain-based exchange in charge of managing the token exchange.

The sale of all the tokens generated a profit of 135,000 euros for the Florentine gallery owner.

This is a turning point for the asset tokenization market: the plan of Look Lateral is to continue on this directive by trying to collect the huge money supply that is slowly moving from the real world to the tokenizable asset market.

It is worth noting that a study by the Boston Consulting Group estimated that by 2030 the market for assets that will be tokenized on blockchain will account for about 10% of global GDP, an increase of more than 26 times current values.

Look lateral’s choice to start this interesting project in Switzerland is motivated by the fact that there it is possible to rely on clear regulations regarding blockchain and security tokens.

In this regard, the company aims to include assets in the future that , unlike the current one, are also financial in nature such as investment fund shares, stocks, bonds and other financial assets.

It will be interesting to see how Look Lateral’s maneuver will evolve given the uncertainty of US regulations on such products, considering also the fact that financial market regulators around the world currently struggle to distinguish utility tokens and security tokens

Utility token vs security token

What are the main differences between utility tokens and security tokens?

This is a fundamental difference that distinguishes two really different kinds of digital tokens.

When talking about utility tokens we are referring to digital coins that have utility within a crypto ecosystem, granting access to services or products of the issuing company. There is no clear regulation yet for what concerns this category of tokens, but they are generally not considered as an investment.

An example of utility tokens are all centralized exchange tokens, such as Binance Coin (BNB) and Kucoin token (KCS).

As for security tokens, there is much more attention to be given: this category of digital assets is mainly concerned with tokens that grant rights to participate in the future income or increase in value of the issuing company.

It can be said in a way that they represent the value of the company: the more the company rises in value, the more the token rises in price in the market.

In this case, regulations are much stricter and more stringent, and the issuance of these assets takes much longer than utility tokens given the need to be approved by financial supervisory and control bodies.

In the US there is a way to determine whether a transaction can be considered an investment or a security, namely through “the Howey Test” a valuation system created and introduced by the “Supreme Court” of the US in 1933

It goes without saying that this test is inappropriate for the “security vs utility” classification, having been introduced a full 75 years before the creation of Bitcoin’s whitepaper.

In any case, a transaction can be considered an investment (security token) if there is an expectation of generating profits from that transaction.

It can be summarized in 3 points:

• investment of money
• presence of a joint venture to “deliver” the money to
• expectation of generating profit

The SEC considers all cryptocurrencies except Bitcoin to be security tokens

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), said in an interview that in his opinion, all cryptocurrencies existing in the world are securities and should be framed normatively as such.

Gensler believes that every transaction made in cryptocurrencies, with the exception of those made in Bitcoin, falls under the jurisdiction of the SEC.

According to him, behind every cryptocurrency is the presence of a group of people who attempt to promote their tokens by promising financial returns.

On the other hand, as is known even to those unfamiliar with the industry, Bitcoin represents an asset in its own right, which can be categorized more as a commodity (hence the name “digital gold”) since there is no team at the head of the Bitcoin protocol promising returns to investors.

In fact, there is really no one behind Bitcoin except the mysterious figure of “Satoshi Nakamoto” and the actors who in a decentralized manner manage bitcoin’s full nodes and block mining activities.

Ethereum is considered by the head of the SEC to be a security token, as it was born in 2014 out of an “Initial Coin Offering” (ICO), that is, a fundraising effort in which investors actually expected their investment to grow in value.

In this regard, it is curious to recall that during its ICO, Ethereum initially sold for $0.311 per token.

Considering that the current price is about $1874, this is a return on investment of 6,041 times the initial one.

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