Security Token Exchange Development – A Comprehensive Guide

Published : Nov 28, 2019

security token exchange development

  • Security tokens or tokenized securities have offered an ingenious way for investors to enter the cryptocurrency world. Unlike utility tokens, they bridge the gap between blockchain networks and legally financial assets. Backed by the Securities and Exchange Commission (SEC) rules and regulations, they have gained significant traction among financial institutions, investors, and service providers. 

    If you are planning for security token exchange development, you may likely get experience success. It is because security tokens’ global acceptance and adoption have increased the need for compliant security token exchange development

    So, let’s start by assessing the potential of security tokens to solidify your decision of security token exchange development. 

    Security Tokens 

    In simple terms, security tokens are backed by tangible assets like a company’s shares, assets, profits, real-estate, etc. Security tokens act like digital assets that supplement crowdfunding and blockchain projects while being compliant with securities regulations. 

    One can smoothly trade private securities on a secondary market by tokenizing them. It makes them free from the administrator requirements of traditional securities. Security tokens involve no intermediaries and provide enhanced inclusivity, quick deal execution, and more

    Security tokens provide the following benefits

    Make illiquid assets liquid: Make small, private non-liquid securities accessible to everyone

    Bring transparency and 24/7 access: Blockchain-powered transparency and trust make a global market always operational and accessible 24/7, thereby enabling faster and cheaper trades.

    Programmability: Security tokens are programmable. One can make security tokens to automate corporate governance, proxy voting, and dividends.

    Besides these, security tokens benefit in the following five ways

    Programmable ownership and compliance

    The programmability of security tokens enables compliance protocols to be coded into the real asset. Also, you can amend the protocols over time. It signifies that there is no limit to the rules and systems to launch an STO.

    Ownership of tokenized assets

    Security tokens provide actual ownership of an underlying asset to users. For instance, if they invest in real estate tokens, they get fractional ownership of that tangible property instead of an IOU.

    Increased innovation

    A regulated and compliant tokenized ecosystem lays the foundation for global acceptance and innovations in the cryptocurrency development world. It paves the way for investment options and lucrative returns. These are the reasons security tokens are in the trend. Businesses and individuals are considering to create security tokens and thereby, indulging in security token exchange development.

    Now, let’s understand the importance of developing a security token exchange or trading platform and its essential aspects. 

    Security Token Exchange or Trading Platform

    Blockchain-powered transparency and trust are the main reasons behind security token exchanges’ increased adoption. Nobody can tamper or corrupt the ownership of digital assets available for trading on the security token exchange. Blockchain’s distributed ledger stores information of all trades conducted on the exchange platform and thus, making them immutable. 

    The things that you can trade through traditional means are also tradable with STE. Users can trade securities like prize bonds, assets, stocks, insurance policies, equities, and swaps on STEs in the form of blockchain-powered security tokens.

    Also Read: Unexpected Ways Blockchain Is Being Used For Disruption

    Mechanics of a Security Token Exchange

    Most of the cryptocurrency exchange platforms do not promote Security Tokens as their systems provide no support for them. In other cases, other platforms don’t get the authority from the respective jurisdiction to enable the trading of security tokens. Blockchain-enabled security token exchange address these challenges faced by multifarious users and investors. The primary advantage of a token exchange is to make liquidity for the cryptocurrency market sustainable.

    Security Token Exchange platforms enable hassle-free buying and selling of assets on the secondary market. Let’s understand with a simple explanation. 

    • A company decides to tokenize its shares, however, not everyone can invest in them. 
    • A company willing to raise funds for its projects tokenize their shares or other assets.
    • The shares or assets are made available to the public for open purchase as security tokens.  
    • Tokens carry some value and investors purchase them after paying a certain price.
    • A security token exchange provides a platform for both investors and token issuers to indulge in trading. 
    • The tokens that investors buy represent a share or asset of that company or issuer. 
    • It is recommended to use the expertise of a security token exchange development company to build an exchange equipped with advanced features. 

    Compliance - Security Token Exchange 

    A security token exchange comes under the category of Alternative Trading System (ATS). An ATS is regulated as broker-dealers, which provides a marketplace to bring the buyers and sellers of securities together, rather than as an exchange. Alternative Trading Systems like STE require approval from the SEC (Securities Exchange Commission). It requires the underlying infrastructure to be fully-compliant to the SEC regulations.

    Traditionally, issuing companies, banks, and peer-to-peer platforms operate in their jurisdiction. They cannot facilitate securities’ trading outside of their jurisdiction. Also, most security trading services are only accessible to specific investors that fulfill the criterion and open during business hours only.

    Security token exchanges built using the blockchain technology from ground zero can, however, these challenges in the architecture. It means that although security token exchange platforms operate according to the jurisdiction, they still can enable trading for a much broader audience, owing to blockchain technology. Blockchain technology enables the ownership of securities to be embedded in the token itself. It facilitates the fast, secure, and efficient transfer of security tokens.

    Security Token Exchange Solution for Businesses

    A Security Token Exchange’s security and reliability are quite efficient and effective. It has opened the possibilities for investment from different fields of business. 

    Security Token Exchange not only enables investments and trading but also facilitates real-life businesses and markets to explore the opportunities of security tokens. Businesses or companies that generally deal in cash can utilize the ultimate functionality of the Security Token Exchange. Any asset carrying some value can use the possibilities and opportunities enabled by security token exchanges. For instance, real-life markets like real estate businesses can increase the adoption of such assets and trading on the Security Token Exchange. 

    Security Token Exchange Features

    If you are planning to develop a security token exchange, consider reinforcing it with the following features:

    Matching Engine

    It matches buy and sell orders with minimum latency

    Hot Wallet Protection 

    It enables users to use a secure infrastructure for security token transactions. Invigorating the wallet with multi-sim functionality can further strengthen its security. 

    Multi-layer security

    It enables secure trading of security tokens. Fortify the exchange with security mechanisms like two-factor authentication, SSL encryption, data encryption, HTTP authentication, anti-Distributed Denial of Service (DDoS), Cross-Site Request Forgery (CSRF) Protection, and more.

    KYC and AML Verification

    Jurisdiction-based KYC enables verify user identity while following the appropriate verification protocol. It enables legitimate and authentic users to securely access the security token exchange. 

    Multi-currency Transactions

    It provides seamless integration of multiple crypto and fiat currencies into the platform following the business needs.

    Integration of Payment Gateway It enables users to buy and sell security tokens with fiat currencies using credit cards and debit cards, and other payment systems.

    Multi-language support

    It expands the outreach of the security token exchange platform globally.

    Security Token Exchange Development with Oodles

    There are multifarious factors that need to be taken into consideration for security token exchange development, like security, performance, user experience, and SEC compliance.

    At Oodles, our blockchain team toil to assist you with accomplishing your business objectives. We develop security token exchanges while making them compliant with the SEC regulations required for an Alternative Trading System. We also provide a range of cryptocurrency exchange development services

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