Security token expert Jesus Rodriguez recently published an article where he explained the difference between two different voting rights seen in security tokens: native-asset voting rights and crypto-asset voting rights. Ultimately, Rodriguez predicts a future of entirely on-chain voting rights for security tokens in a matter of months.
Security Tokens and Voting Rights Explained
Jesus Rodriguez believes security tokens will feature on-chain voting rights within the first quarter of 2019.
Security tokens are typically known to feature ownership claims regarding traditional financial securities: equity, investment funds, REITs, real estate, fine art, etc. While the majority of existing security tokens do feature ownership claims, they can also represent other aspects such as cashflow and voting rights.
As this new generation of tokens becomes increasingly liquid and its trading volume progresses, the need for voting will become important, says Rodriguez.
Thanks to programmable smart contracts, voting rights can be embedded in security token protocols. However, Rodriguez has proposed two main categories of voting rights for security tokens: native-asset voting rights and crypto-asset voting rights.
How Native-Asset Voting Rights Can Work with Security Tokens
Native-asset voting rights include corporate governance decisions which have the potential to impact the performance of the real-world asset which a security token represents.
Examples of this type of voting right can include the following:
- New board seats awarded by a company
- Sales or change of control of the underlying asset
- Dividend payments
- Raising institutional capital
- Taking on additional debt
- Issuing new shares
- Director compensation
As Rodriguez points out, publicly traded companies allow for certain shareholders to have an influence on the company’s direction. Security token holders should have similar rights when it comes to the underlying asset of their security tokens.
Crypto-Asset Voting Rights for Security Token Holders Explained
There are certain on-chain protocols which are more directly related to the security token itself, and these are deemed ‘crypto-asset voting rights’.
Some examples of crypto-asset voting rights are as follows:
- The burning or minting of new tokens
- Listing on additional exchanges
- Integrating with a specific crypto-protocol
- Supporting decentralized exchanges
- Undergoing a crypto-security code audit
These, says Rodriguez, should also be subject to a certain governance process, though they are distinct from the aforementioned native-asset voting criteria.
The Transition to On-Chain Voting Rights for Security Tokens Explained
The majority of current security token standards feature off-chain governance. This however is not likely to last as the security token industry continues to quickly evolve, since token holders will reasonably expect to participate in governance decisions for the life-cycle of their underlying real-world asset.
With that being said, Rodriguez has proposed a certain three-step transition to on-chain voting:
- Off-Chain Voting Rights— the current model for most security tokens
- Off-Chain Voting with On-Chain Record— off-chain voting, with the results recorded on-chain
- On-Chain Voting—the implementation of an on-chain protocol which will allow token holders to participate in governance decisions that impact the off-chain and on-chain performance of the security token.
To take things a step further, Rodriguez believes the security token industry is developing at such a rapid pace that he sees a transition from the first to the third stage “in the next few months”.
What do you think about Rodriguez’s future prediction of on-chain voting rights for security tokens? Do you agree that the industry will witness such development within a matter of months? Let us know what you think in the comments below.
Image courtesy of district0x.