The rise of blockchain technology has introduced a new form of digital asset: security tokens. These tokens represent ownership of real-world assets such as company equity, real estate, or commodities. They provide a more efficient and secure way to transfer ownership while giving investors greater liquidity and transparency.
Like any new technology, security tokens face challenges. The most pressing is standardization. This article explores why security token standardization is difficult, and why a single global standard may not be achievable.
The Need for Security Token Standardization
What Is a Security Token Standard?
A security token standard is a set of rules that governs the creation, issuance, and transfer of security tokens. Standards ensure compliance with regulation and enable tokens to be traded across different platforms.
The best-known token standard is ERC-20, created for utility tokens on Ethereum. But because of their unique legal and regulatory features, security tokens require new standards tailored to them.
The Benefits of Standardization
Standardization supports adoption. It gives investors confidence that the tokens they purchase comply with regulation and can be traded seamlessly across platforms. It also helps issuers, who can follow clear guidelines instead of navigating complex regulatory frameworks on their own.
The Limitations of Security Token Standardization
Regulatory Differences
One major limitation is the variation in regulation across countries. Each jurisdiction has its own rules for securities. For example, the United States imposes strict securities regulations, while countries like Switzerland and Singapore are more flexible. A security token that complies in one country may not meet requirements elsewhere, blocking any universal standard.
Nature of Underlying Assets
Security tokens can represent many asset classes: stocks, bonds, real estate, fine art, and more. Each type of asset comes with its own rules and requirements. Tokenizing real estate, for instance, involves different regulations than tokenizing equities. A single standard cannot easily cover all these differences.
Complexity of Tokenization
Tokenizing an asset requires legal, technical, and financial work. The process differs depending on the asset, making it hard to design a one-size-fits-all standard.
Real-World Examples of Standardization Limits
The Case of tZERO
tZERO, launched in 2019 by Overstock.com, is a trading platform for security tokens. Its goal was to enable compliant and regulated token trading. However, the lack of industry-wide standards has created obstacles. In an interview with Forbes, CEO Saum Noursalehi said: “The biggest challenge we face is the lack of standardization. There are no standards for security tokens, and each token is unique, which makes it difficult to create a platform that can support all tokens.”
The Future of Security Token Standardization
Despite the challenges, efforts are underway to develop frameworks for security tokens. Still, because of the diversity of regulations and asset types, a single universal standard may never exist. Instead, we are more likely to see a fragmented approach—with different standards emerging for different assets and regions.
