The Importance Of Regulation: Security Tokens & ISIN Numbers
Regulation provides confidence and security to investors.
Regulators around the globe are working to ensure that appropriate regulations are in place to facilitate the broader adoption of security tokens. These regulations are necessary to protect both investors and the integrity of markets.
Proper regulation for security tokens should provide the same protections currently given to investors in traditional markets. As security tokens are a relatively new investment instrument, it will be essential to ensure that regulators keep pace with this rapidly evolving financial landscape.
Before we delve into the regulation of security tokens, it is necessary to address the nature of regulation. Investors must be given protection through legislation because, without protection, investors are open to risks from theft and manipulation. However, not all regulation benefits individual investors or the broader market. Regulation is often used to stifle competition and protect the financial interests of those who can afford to pay lobbyists. Regulation of this type results in systemic corruption that produces significant harm. As a general rule, regulation favouring individual investors is preferable to regulation favouring powerful private financial interests.
Security tokens can significantly improve the functions of capital markets and bring wealth creation opportunities to a more significant percentage of the world’s population. In December 2020, the market capitalization for security tokens was over $374 million, yet The World Economic Forum has estimated that tokenized markets could be worth up to $24 trillion by 2027.
The growth potential for security tokens combined with reduced friction promises to revolutionize how global markets operate. Security tokens can be continuously traded from smart devices, and importantly they can be fractionalized. This fractionalization allows for greater participation from investors who have previously been unable to access capital markets.
It is estimated that the wealthiest 1% of the globe now holds as much wealth as the rest of the world combined. Financial markets have traditionally been the domain of the wealthy, but through fractionalization, these markets will become accessible to smaller investors. This evolving investment landscape emphasizes the need for appropriate regulation to protect individual investors.
Numerous countries are contributing to the development of regulations for digital securities. Germany’s cabinet recently approved legislation to facilitate the use of security tokens for transacting traditional securities. Singapore has aggressively approached regulation with DBS bank recently announcing the launch of an exchange dedicated to digital assets and tokenized securities. Singapore’s approach reflects the perspective of other small nations such as Cyprus, Luxembourg and Monaco, who see regulation as a competitive edge in this evolving marketplace. Appropriate regulation will be the foundation for investor confidence in digital securities.
One mechanism that has traditionally provided investors with insight into securities investment is the ISIN system. The ISIN Organization is independent of governments, banks and financial institutions and registers identification numbers for regulated securities. These are known as International Securities Identification Numbers (ISIN). These numbers can only be issued to regulated securities and uniformly identify securities for global trading and settlement purposes. Investment institutions rely on ISIN numbers to identify and justify their securities investments to their boards.
MetalStream’s MSGLD is a regulated security that has been issued with the International Securities Number: MYA165612B00. In the market for gold-backed security tokens, MSGLD is the only participant which has undertaken this process. Why other products have not taken steps to be issued an ISIN is unclear. Perhaps their gold-backed tokens do not qualify as regulated securities. Ideally, all participants in the gold-backed token industry would be regulated securities and obtain ISIN identifications. Due to the risks associated with investing in unregulated products, regulated securities provide greater protection for investors.
As the market for digital securities matures, we will witness an increasing emphasis on regulation. It will be important that these regulations are focused on the needs of individual investors rather than the desires of private financial institutions. The transparency and accountability afforded by the blockchain will assist this process and help promote best practices amongst market participants. As the regulatory framework develops, we will follow it closely to identify the opportunities and threats of regulation.
MetalStream is the issuer of the innovative gold-backed MSGLD token.
Authored by Scott A. Joseph and originally published here on January 06, 2021.
Scott A. Joseph is a blockchain specific author and marketing specialist. He is currently the CBO of Arah Global and provides consultancy to Blockchain projects in Asia. You can reach him through LinkedIn or via his email address.
