Security Tokens: Definition and Characteristics

Cryptocurrency Guide » Tokens » Security tokens.

What is a security token

A security token is a type of cryptocurrency that represents a stake in an underlying asset or value. Security tokens can be issued and traded on a blockchain and their value is backed by a tangible asset, such as company stocks or real estate.

It is a way to tokenize assets, allowing companies to raise funding in new markets and investors to invest in a more accessible and transparent manner.

How security tokens are issued

Security tokens are issued on a blockchain platform through a process known as Security Token Offering (STO).

During an STO, a company or an asset is tokenized and represented in the form of security tokens. Investors can acquire these tokens and participate in the success of the company or asset they back.

The process of issuing equity tokens, a type of security token that we will see next, is also known as ETO or Equity Token Offering.

Types of security tokens

There are several types of security tokens, each with different characteristics and uses. Some of the most common types include:

• Equity tokens: They represent ownership of a company and offer investors voting rights and a share of the company's profits. The definition of equity tokens is not yet well defined by the community, and some users include any tokens that grant ownership and governance rights over an asset. This includes tokenizing a company's shares, but also those of funds or real estate investments.
• Debt tokens: They represent a debt and offer investors a return in the form of interest and a maturity date for the repayment of the principal.
• Real Estate Tokens: They represent a real estate asset and offer investors a stake in the ownership of a property. As mentioned, it is common to find them included within Equity Tokens. But due to their popularity, we have deemed it appropriate to separate them in this list to highlight the importance they are having in the crypto space.

Advantages and disadvantages of security tokens

Advantages

There are several advantages to using security tokens instead of traditional financial assets, such as:

• Efficiency: Security tokens enable greater efficiency in the representation and negotiation of assets, as they use blockchain technology to automate and simplify many of the traditional processes of securities markets.
• Transparency: Being tokens on a blockchain, security tokens offer greater transparency in the representation and negotiation of assets, allowing investors to easily and quickly verify relevant information.
• Accessibility: Security tokens allow investors from around the world to participate in securities offerings without having to comply with the requirements and procedures of regulated securities markets.

Disadvantages

Although security tokens offer many advantages compared to traditional financial assets, there are also some disadvantages, such as the following:

• Complexity: The use of security tokens and blockchain technology can be complicated for some investors, especially those who are unfamiliar with these concepts.
• Regulations: The security token space is still evolving and in many countries, regulations are still not clearly defined. This can be a hurdle for some investors who seek a higher degree of security and regulatory clarity.
• Liquidity: Compared to traditional financial assets, security tokens may have lower liquidity due to lower adoption and acceptance by investors and financial institutions.

Conclusions

In conclusion, security tokens are an innovative and efficient way to represent financial assets on a blockchain platform. Although there are still challenges and evolving regulations in this space, security tokens offer many advantages compared to traditional financial securities and can be an attractive option for investors seeking greater accessibility, efficiency, and transparency in managing their assets.