1/ How exactly do security tokens work?
2/ At a high-level, pretty much all security tokenization companies work the same way: An issuer issues a security token which represents an ownership claim in a company.
3/ These issuers then create and curate wallet addresses (usually Ethereum) of investors who are allowed to buy stakes in the company.
4/ This is how compliance is enforced. If an individual is not qualified to invest, they arent on the "white list"
5/ Issuers can also outsource the curation of whitelists to third party providers. This then creates a liquidity pool where everyone on the whitelist can trade with each other.
6/ There is no way a security token protocol can have the regulations of hundreds of jurisdictions baked in but the vast majority of regulation can be complied with by restricting who can own the token. This is what the whitelist does.
7/ You can trade these things anywhere or any way you want as long as your counterparty is whitelisted. @tzeroblockchain, @Blocktradecom and @OpenFinanceIO finance are of the exchanges where you will be able to trade security tokens.
8/ @Harbor is one platform for tokenizing private securities. The way it works is they are basically an oracle in the ethereum ecosystem.
9/ If you try to trade a security token woth someone, then it pings @harbor to make sure that they are whitelisted and if they are, it goes through. If not, it throws an error message.
10/ In a way DEXs are better for security tokens because there is no custodial risk and because they are settled on the main chain so the oracle gets pinged immediately.
11/ If a centralized exchange does not settle security token trades to the main chain in a timely fashion then the oracle doesnt get pinged and that can cause problems.
12/ Security tokens are not bearer instruments. You can't steal a security token because a token is not a security, it is an electronic representation and no one can transfer a token to their wallet unless their wallet is whitelisted
13/ Issuers will allow Centralized Exchanges to do kyc/aml and due diligence on investors and add them to the whitelist so that exchanges dont have to go to issuers every time someone wants to trade their token.
14/ Security tokens will help private companies keep track of their cap tables without an army of lawyers which is surprisingly problematic.
15/ There was an infamous messy case in 2003 where Dole foods thought they had 34k shares outstanding but investors thought they owned 46k shares.
16/ The real benefit here is from the liquidity that comes from security tokens being traded around the world, 365 with near instant settlement.
17/ The most important part of this is the global part. It is still very difficult for investors to buy securities in other countries.
18/ The other major platform besides @harbor is @polymathnetwork. One of the key distinctions is that polymath is trying to be more decentralized so even if they disapear the protocol will live on.
19/ Harbor is more centralized, but that allows them to be an end to end service provider and one stop shop for issuing a security token so it is a bit more pragmatic.
20/ These are my notes from Part 2 o the @nomicsfinance podcast series on securities token. check it out - blog.nomics.com/flippening/sec…
