What are Security Tokens?

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What are Security Tokens?

If 2017 was the year of the utility token, 2018 will be remembered as the introduction of an entirely new ecosystem of platforms, exchanges and funds looking to capitalize on the new global opportunity in tokenized securities. Tokenization is becoming increasingly popular amongst more traditional issuers and investors as increased crypto market regulation continues to help bridge the gap between the crypto universe and traditional financial markets assets.

However, before we jump straight into security tokens, let’s recap on the basics first.

What are tokens?

A token is a unit value that exists on an existing blockchain. Tokens do not have their own blockchain but depend or exist on an existing blockchain of a cryptocurrency. Eg, Ethereum, Bitcoin etc. A token has a unit value, that value is tradable. The value can be in the form of coins, points, certificated, in-game items etc.

Tokens are often used to raise funds in an ICO (Initial Coin Offering) or crowdsale which can be compared to IPO (Initial Public Offering) of companies going public on stock exchange. In case of ICO, the companies go public on blockchain. 

Just as you buy a share in a company in IPO, in ICO or Token Crowdsale the tokens you buy can be used to represent a share in the company or can be your voting rights for decision making. The tokens therefore are also called cryptocurrency assets or crypto assets and crypto equity. 

The major difference between a cryptocurrency and a token is that cryptocurrencies have their own separate blockchain on the other hand tokens are built on a blockchain, such as Ethereum, Bitcoin etc., that facilitates the creation of decentralized applications.

Difference between ‘Security’ Tokens & ‘Utility’ Tokens

Security tokens represent equity or debt of the new company and Utility tokens represent the right to use of a product or service, or cater to a specific function in the ecosystem of the new company.

The purchase of security tokens is seen as an investment because they represent ownership therefore, they are subject to National securities regulations. On the other hand utility tokens are not considered as investments as they provide access to the product of service.

Security Tokens:

  • Represent equity or debt of a startup.

  • Purchase of security tokens is seen as an investment.

  • Security tokens are subject to federal securities regulations.

Utility Tokens:

  • Represent the license to use the product.

  • Purchase of Utility tokens is not seen as an investment.

  • Utility tokens are not subject to National  securities regulations

Why tokenize?

Advantages of tokenization include fractionalization of larger assets, increased liquidity, lower issuance fees, and greater market efficiency. However, the greatest benefit that security tokens provide an issuer is access to a global pool of capital. As these tokens can be sold and traded internationally (when compliant with regulations), they become more fairly priced and, therefore, attractive to investors. This regulated compliant offering is appealing to both institutional investors for it’s more recognizable structure, and to crypto investors for its technological innovation.

New Term to Know:
’STO’ — a security token offering. Similar to ICO for utility token offerings.