We often equate crypto-assets with bitcoin or other cryptocurrencies. But “crypto-asset” is actually a much broader term covering security tokens and new disruptive models for the security value chain from issuance to custody and settlement

Executive summary 

When we talk about crypto-assets, the first idea that comes to mind is bitcoin, followed by other token currencies. But the term “crypto-asset” covers much more than just crypto-payment.

At present, we lack a shared definition of the term crypto-asset, but this is essential if we are to properly define and understand what does and does not qualify as such. This is important because different types of asset are treated differently from an operational and a regulatory perspective.

A global consensus has emerged in relation to dividing crypto-assets into four main archetypal assets: payment/exchange (e.g., bitcoin and equivalents), security (investment components including ownership and promise of future cash flows), and utility (access to specific products, services or protocols). These assets can also be combined in various hybrid forms.

This paper aims not only to clarify what is meant by the term crypto-asset, but also to assess current solutions and the related regulatory framework. We will be providing an overview of the business opportunities and impact of using security tokens within a Distributed Ledger Technology (DLT) ecosystem by considering issues relating to the primary market (issuance/notary services), trading and post trading (clearing and settlement), and safekeeping and custody services.

After 10 years spent getting to grips with divergent regulatory frameworks, securities market stakeholders are at a pivotal state in their transformation in which they must balance a need for transparency and risk mitigation in relation to their environment against the need to make the process as efficient as possible.

Are security tokens the answer to this conundrum? Are security tokens the securities of tomorrow? In our view, the answer is yes. The security token is the security of the future. European and local authorities now acknowledge that DLT platforms and security tokens can provide clear added value in terms of transparency, efficiency and enhanced reporting/oversight.
However, taking advantage of this opportunity will involve adopting two main principles.