Bankruptcy Restructurings: Are Security Tokens a Welcome Feature for Investors and Creditors?

Most bankruptcy procedures follow a similar pattern. Creditors and trustees work to recover losses as best that they can, traditionally embarking on a drawn-out and complicated process. Investors hope to recoup as much as possible of their original investment, usually having resigned to the fact that there is no potential to benefit from the said company’s insolvency. Surely in today’s world of second chances, there should be a better alternative? Fifteen years on from the shocking Bernie Madoff takedown and investors are still looking to recover their losses. 

The flip side is that public companies and the stock market were designed to be the very essence of America’s democratic economic landscape. Wall Street is where the kid’s savings, the loving grandparents, and the largest financial institutions all participate in a fair, open, and honest marketplace. 

Fast forward to today, and lessons learned have led to investors’ expecting, rather demanding, protection and safeguards regarding insolvencies and bankruptcies. 

With the recent downfall of Celsius Network and the collapse of FXT in real-time, how do we ensure that investors are protected from wrongdoing, be it fraud, theft, or other dishonest irregularities? Participants understand that businesses fail and there are no guarantees in the world of market speculation. However, what has become paramount in today’s economic climate is the need for investor safeguards and asset protection. This shortcoming in the system needed to be fixed.

Bankruptcy does not have to be the end

Security tokens, more specifically, the mechanism of this new asset class, can have the ability to provide a solution to democratize and simplify the rules of bankruptcy for investors as well as creditors. These blockchain-based assets can be SEC regulated, thereby enabling the recovery of unforeseen losses and, better yet, the opportunity to profit from such a recovery. 

This means the potential of future cash flows will entitle token holders to participate in possible future equity and profits from a restructured business. This is the protection and opportunity that investors are looking for. Traditionally there were no opportunities to profit from insolvencies that regrouped and attempted to turn their businesses around.

An opportunity and a choice to participate in a regulated environment

Security tokens are not cryptocurrency. 

It is a regulated tokenized asset issued on the blockchain and represents an investment in an enterprise. It is publicly traded on a regulated market. 

Every security token is not the same and privileges like equity, profit share, and voting rights can be customized as per the issuers (and holders) individualized smart contract. 

Every aspect of the entire process, end-to-end, is conducted under SEC regulation. 

Note that these rights are not inherent to security tokens, and the issuer has the option to register their token with a regulated entity, like the SEC, (clearly, a route Celsius Network and FTX chose not to follow).

In doing so, the regulated issuer becomes a public company under SEC oversight. 

The issued token provides the same regulatory protections afforded by the SEC to any holder of public security. Two integral elements of this digital procedure differ from the original SEC process, namely the level of transparency and blockchain-enabled self-custody. 

Practically, after the initial coin offering has been deposited into the participant’s wallet, that token becomes tradable on a public market offered by a registered broker-dealer. Although the registration process follows traditional SEC protocols, it is considerably less arduous, less timely, and less costly than the traditional process. 

This new road forward embraces peer-to-peer systems where the issuer is directly connected with the token holder on a fully regulated end-to-end platform - from the initial offering to instant settlement.

This alternative to traditional equity markets also has the distinct advantage of availability - 24 hours a day, 365 days a year, with instant settlements, delivered directly into an investor’s wallet. 

The underlying structure of a digital economy is based on the inherent benefits of security tokens.

The INX way

INX is the world’s first fully regulated platform, merging investing and trading in security tokens, cryptocurrencies, and capital raise services all in one place, on ONE platform, under SEC regulation. The INX Token was the first SEC-registered security token to IPO on the blockchain, making it available to the US public and global investors.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

Authored by Itai Avneri - COO & Deputy CEO, INX