This article is part 1 of a 2 part series, you can find part 1 here: 4-key-components-to-build-fractional-ownership-on-the-blockchain
What Are Security Tokens?
In laymen terms, security tokens are just a unit or share in a distributed fund on the decentralized network. Security token represents an automated investment contract similar to traditional financial contracts. Fundamentally security tokens are different in terms of its regulatory process.
Security tokens exist on two main pillars:
- Investment in a fund with expected profit return
- Regulated by federal law that governs security
Security tokens offer a vast array of applications if a company abides by all the regulatory requirements. In this blog, we will be discussing how we utilized security tokens for property fractional ownership application for an Australian based startup.
Scope of Project
The listed property will be divided into multiple security tokens and ownership of the property will be claimed by security tokens holders. The number of security tokens against a specific property can be defined based on different features such as the area of the property or market valuation. The owners of the property (Security Tokens Holders) can sell their share of the property through the portal.
The rest of the blog talks about a proof of concept developed by blockchain experts at JTC for fractional property ownership. We use ERC-981 interface for this application and recorded transactions on Ethereum blockchain.
Step 1: Issuing Security Tokens for Property
It starts by representing property on blockchain platform by the property owner. Any user/owner can represent his property with property address and wallet address on the platform and issue N number of security tokens against specific property. The owner can also upload specific documents and images related to the property in the portal.
In the example below, Property owner John is issuing 1 Million Security tokens against his property addressed as “630/317 Castlereagh Street Sydney, NSW 2000“.
Issuing Security Token
Security Token Holders
Step 2: Selling Security Tokens
In the next step, the primary owner can distribute fractional ownership of the property to many people through security tokens. The portal allows the owner to sell any percentage of the ownership to any verified person through security tokens.
Continuing the above example, John wants to sell 50% ownership (500K Security Tokens) of the property to Marry. Through the portal, he can easily transfer 500K security tokens to Marry’s wallet.
Now John and Marry both share the 50% ownership in the property. Further, the portal allows John and Marry to sell their percentage of ownership to multiple people through the same process.
Updated Security Token Holders
Since blockchain guarantee that transactions once recorded cannot be tampered with, the software we built demonstrates how it can be used to list any property and raise funds and give partial ownership on the blockchain.
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