Security Tokens: The Future of Securities?

Tobias Hedelund Hermansen

Student thesis: Master thesis

Abstract

Security tokens are new regulated crypto assets and they work in the same way as traditional financial securities, but are digital, programmable and built on blockchain technology. The main distinction lies in the decentralized network in which they operate. They do not require intermediaries to record and register transactions as investors can transact peer-to-peer and in addition hold their securities themselves without the need of a custodian. This paper investigates the economic impact security tokens have on investors and financial markets. By analyzing investor behavior through game theory, the paper shows that investors will act very differently when blockchain technology is introduced into investment strategies. Furthermore, the paper shows through portfolio theory that security tokens will help SMEs raise capital, which makes these investments more liquid and therefore, leads to a much lower liquidity risk for investment funds, VC-investors and Private Equity. The paper additionally examines how security tokens are regulated in the Danish capital market and to what extent. The analysis shows that security tokens are affected by the Danish Capital Market Act which is largely based on European regulation (MiFID II. The analysis shows that other regulation uses the same definition as MiFID, which effectively make security tokens regulated by these. Lastly, the analysis shows that the current regulation is based on traditional securities and this pose a constraint on security tokens. The paper concludes that law makers have to accommodate the laws to this innovative technology either through new laws or annexes to current laws. Overall the thesis shows that an introduction of security tokens to our financial markets is likely to have an impact on regulators, investors, SME’s and financial institutions. This is due to changes in investment strategies and funding in addition to the change in setup of financial markets.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages65
SupervisorsPeer Schaumburg-Müller