In classical finance, a security is defined as a share in a publicly-traded company (like a stock) or as a creditor relationship with a public institution (like a bond), or a right to ownership in options contracts.
Tokenised securities are known as security tokens. To put it another way, they are digital securities that exist on a blockchain. A portion of any valued item might be represented by these tokens, such as a vehicle, real estate, or company shares.
What is the purpose of these tokens, how do they function, and what are the advantages of using them? Here, we’ll be tackling all those things.
Tokens and Coins
To begin, it’s important to distinguish between tokens and coins. Anything that flows over a blockchain is frequently referred to as “cryptocurrency.”
Coins and currencies, on the other hand, are crypto assets that have their own worth. All three cryptocurrencies, Bitcoin (BTC), Litecoin (LTC), and Ether (the Ethereum network’s native currency), are classified as “coins.” To put it another way, their primary function is to hold value and facilitate the transfer of goods and services. As a coin trader, you’re always looking for smooth transactions. Immediate Edge provides that reliable and legitimate experience.
However, crypto tokens have a special purpose. For example, utility tokens and security tokens are two kinds of tokens. They are supported by an actual use case for the token and the project or firm that created it.
Brave’s Basic Attention Token is a utility token (BAT). Users of the Brave browser are given this token in return for agreeing to see advertising. Users of Brave may then tip their favourite content providers with the tokens they’ve earned. The BAT token is an ERC-20 token that runs on the Ethereum blockchain.
What is a Security Token?
Security tokens don’t need to be used for anything in order to be considered useful. Most generally, a security token represents a stake in the firm that issued it. Similar to purchasing stock on an exchange, this is a kind of conventional investment. Security tokens are thus also known as equity tokens because of this.
In the eyes of the financial industry, security tokens are securities. As a result, a security token is subject to the same rules and regulations as other financial instruments like stocks and bonds.
Some crypto investors would see this as a negative, given that the market is currently unregulated or operating in legal limbo. Security tokens, on the other hand, provide investors with the legal protections and regulatory certainty they are used to in the realm of conventional finance.
How do they work?
Security tokens are created in the same manner by most firms. It is expected that the corporation would issue a security token that reflects a claim of ownership in the enterprise. As a further step, they create a whitelist of crypto wallet addresses from which investors may purchase the tokens.
An investor’s ability to demonstrate compliance with any limits or rules placed on an asset is a requirement for inclusion on the whitelist. Compliance with KYC and AML requirements is a bare minimum need for this to work. While it’s impossible for a security token to include all the requirements of multiple countries throughout the world into its protocol, corporations may comply with most regulations by limiting who can acquire and keep the token.
Most users may trade security tokens in any way they choose as long as they use a counterparty that is on a whitelist. First-generation exchanges for this form of trading include Open Finance, Blocktrade, and tZero.
What is their purpose?
Because security tokens may represent digital contracts for the ownership of a portion of an asset, they are distinct from other cryptocurrencies in this regard.
Many uses may be found for this sort of token. Using a blockchain, real estate investment trusts (REITs) may issue shares of stock that would be equivalent to owning a piece of real estate.
Many more potential investors would have access to a company’s equity prior to its initial public offering (IPO) on a major stock exchange via the use of security token (STO) systems.
What are the perks?
There are no delays, costs, or friction connected with security tokens, unlike conventional capital markets. At the same time, a security token may fractionalise any existing asset in the conventional market, regardless of how large that market may be.
This means that investors may be certain that their interest in a blockchain-based token will be retained on a publicly accessible ledger. There is little to no room for market manipulation, corporate dishonesty, or confusion about how many shares there are or who owns them in the market..
Regulators’ classification of tokens as securities provides investors with a sense of security, removing any confusion about what laws govern the acquisition, sale, or ownership of security tokens.
Can I invest in it?
To begin investing in security tokens, an STO platform is a good starting point. These digital assets are hosted by these exchanges, letting investors purchase and sell tokens just like they would stocks or any other investment vehicle.
In an effort to make capital markets more accessible to a broader range of people, projects like The Elephant, Funderbeam, and Causam Exchange are using blockchain technology to connect conventional and crypto markets.
Bottomline
Security tokens are digital representations of ownership in a blockchain-based firm.
The opportunity to have some voice in how the corporation that issued the security tokens operates is a key aspect of most of these tokens. As a shareholder, you are immediately affected by the value of the firm you invest in when you acquire a security token. Unlike a cryptocurrency coin, where the value is based on demand and other people’s faith in your platform (in which you are now an owner), this is not the case here.
There are a lot of different ways to think about security tokens. To put it another way, they combine the best of both worlds. By making it easier for more individuals to invest, some crypto enthusiasts believe that security tokens will strengthen global financial markets.
