Benefits of security tokens
What I have described in the last article on how a security token should come into being is my assumption based on the Shariah sequence. Being a layman in the tech world, I invite the crypto experts to review the steps and suggest on how the process can be made more efficient and effective to provide this fascinating innovation to retail investors across the globe.
The viability of having an Islamic security token should also convey, one more time, as to the flexibility and useability of the Shariah nominate contracts during all ages without the need to change their underlying parameters for developing any new product at any time.
The benefits related to the real estate security token are gradually emerging. However, it does not mean that the tokens are confined to immovable properties. There can be security tokens for any Shariah compliant and revenue-generating project or asset.
I describe below some of the benefits I could think of at this early stage of the emergence of security tokens.
• As for the revenue-generating real estate assets, it is everyone’s preferred choice and easy to make the investment decision. However, what about an industrial project or mining, or something new such as renewables, etc? You will not find the traditional investors making the jump although it may prove to be more lucrative than real estate. Here, the security token can help bring in small and big investors alike since the value of each token being fractional overrides the investment risk. The institutional investors can test the opportunity by way of small investments and upon being convinced, can increase their holdings through the secondary market. On the contrary, if they find the trivial investment in security tokens not up to the mark, they can easily exit through 24/7 trading at a minor loss.
• Countries always try to deepen their financial market, which includes the money market for short-term investments spanning from overnight to weeks, and the capital market for medium- to long-term investments. Deepening the financial market ensures the availability of abundant liquidity at all times. The security token has enormous potential to meet both objectives.
• Governments build large assets for the purpose of their functioning as well as provide services and convenience to the people. These include buildings occupied by the ministries and departments, infrastructure projects such as roads and bridges, dams, power and water, parks, hospitals and others. Similarly, the private sector also builds malls, residential complexes, hotels, healthcare services, amusement facilities, etc. In short, a colossal amount of money goes into building these hard assets. Security tokens can be effectively utilized to get the huge liquidity blocked in these large assets efficiently released, which can then be utilized by the governments for meeting fiscal deficits or providing subsidies to the people for utilities and essential goods, etc. As for the private sector, tokenization of assets will provide them with ample opportunities for reinvestment in the expansion of existing business or look for other profitable ventures.
• An important benefit through security tokens shall be to help release the ever-mounting funding pressure on the country’s banking sector which will then be able to spare large amounts of liquidity for projects of national interest.
• Since security tokens are digitally traded, they are not bound by the trading time set by the bourses. Hence, the 24/7 global trading makes security tokens highly agile and convenient to deal with.
• Another advantage of security tokens is that they internationalize the ownership of the local assets since anyone from anywhere in the world holding any amount can buy the tokens through the mobile app connected to a specialized platform, and sell them whenever needed. This is tantamount to attracting capital from abroad, also known as foreign direct investment or FDI.
• Since security tokens are traded on specialized digital platforms, the ownership record for their holders cannot be altered or deleted and is permanently available for anyone to verify. This feature reduces the security risks as well as addresses the anti-money laundering aspect very well.
• An entity tokenizing its revenue-generating assets does not need to go public. I have just observed a flurry of IPOs in Dubai and know that they cost a large amount of time and money before the launch as well as in their aftermath. All of this can be saved by opting for security tokens.
• Also, listed companies are required to adhere to a country’s Securities Act and follow the bourse’s requirement to submit periodic financial results and provide explanations. A company can generate a similar amount of capital without going through all of this.
At the end of this article and wrapping up the subject of security tokens, I would like to conclude that technological advancement has opened up a huge opportunity for both the public and private sectors to get the liquidity from their hard assets released.
At the same time, security tokens have enabled investors to look beyond their boundaries and earn better dividends besides diversifying their investment portfolio. And the icing on the cake is that both parties can do it in a fully Shariah compliant manner.
I strongly believe that the future of the Islamic financial industry lies in security tokens.
I can safely make the statement based on my personal experience of working on the world’s first-ever listed Sukuk issued by Malaysia way back in 2002. At the time, having recently switched sides from conventional to Islamic banking, I was fascinated by the making of Sukuk and knew that it will become a very successful capital market instrument. I hope I am correct this time around too.
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at sazubairi1979@gmail.com.
Next Week: Celebration of completion of 200th article.
