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Colorada State passes law to explore security tokens for state funding

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Yesterday the State of Colorado passed legislation requiring the state treasurer to explore using security tokens for state capital financing by March 2023. If the treasurer recommends a go-ahead with blockchain-based funding, an additional law to authorize security tokens would need to be passed. Real estate assets would back the security tokens.

The motivation for the feasibility study is to reduce costs. It’s argued that it would broaden the pool of investors, and in doing so, it expects to achieve a lower interest rate. In addition, it believes it could cut funding costs associated with underwriting fees by reducing the dependence on commercial banks and institutional investors. It also hopes to make the investments available to Colorado citizens.

Colorado can’t raise long term funding without asking for citizen approval. As a result, it tends to raise money either by short-term financing of tax receipts or leasing arrangements. 

The latter are referred to as ‘certificates of participation’ (COP) and the Colorado Supreme Court has twice ruled they are not a form of long term debt. These COPs might involve the state transferring its interest in a building to a lessor who assigns it to a bank. The state then leases the building, making annual payments that include principal and interest. At the end of the lease, the building reverts to the state.

These COP real estate arrangements are the target of the potential security token issuance. The new legislation also extends the types of collateral used for construction financing from a building, structure or facility also to include land.

Meanwhile, in other jurisdictions, security tokens are also getting attention. Europe has passed the laws that allow for a DLT pilot regime for security tokens relating to equity, debt and funds. And in Japan, the Osaka Digital Exchange launches this month, with plans for a security token secondary market next year.

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