What is a Security token in Cryptocurrency? Security tokens are a unique innovation that promises to offer more financial options to retail investors. Cryptocurrencies are often viewed as competitors to traditional financial institutions.
In the case of security tokens, Web3 developers are fusing aspects of blockchain with traditional financial services. These digital assets are similar to securities that can be purchased through brokerage firms that follow the Securities and Exchange Commission’s (SEC) guidelines and policies.
However, it can be difficult for newcomers to clearly define what is a security token in cryptocurrency and how security tokens differ from other cryptocurrencies to make more informed decisions before purchasing a digital asset.
Let’s break that down for you!
What is a Security token in Cryptocurrency?
A security token is a type of cryptocurrency that represents fractions of real-world assets like equity, a company, or real estate. Securities include stocks, bonds, ETFs, options, and futures contracts. Any of these things could theoretically be tokenized to become a security token.
Security tokens represent a stake, share of stock or equity, voting rights, and dividend rights in the asset represented. Owners or holders profit from the actions and decisions of the issuers or managers.
They are distributed via a Security Token Offering (STOs). Their applications include situations in which investors require instant settlement, transparency in management, asset divisibility, and so on. Some examples of security tokens include blockchain capital (Bcap), and sia funds amongst others.
Why Use Security Tokens?
Security tokens are digital, liquid contracts that allow you to own a portion of an asset. Security tokens have the ability to fractionalize any asset that already exists in the traditional market, regardless of its size. For example, a company can distribute tokenized shares to investors. These tokens can be designed to provide the same benefits as stocks, such as dividends and voting rights.
Because of the nature of transactions, financial regulators must control and govern their exchange, issuance, dealings, value, tokenization, backing, and trading to protect user investments. This rule exists to protect user funds and investments, as well as to hold founders accountable.
Security tokens, like cryptocurrencies and other types of tokens, benefit from the properties of the blockchains on which they are issued. These properties include speed, transparency, complete uptime, and divisibility.
- Speed: Settlement and clearing have long been regarded as bottlenecks in traditional markets when transferring assets. The process is automated on a blockchain and can be completed in minutes.
- Transparency: The identities of participants are abstracted on a public ledger, but everything else can be audited.
- 100% Uptime: Existing financial markets are open during specific times and are closed on weekends. Digital market assets, on the other hand, operate around the clock.
- Divisibility: Security tokens allow ordinary retail investors to invest in high-value assets such as art and real estate. This feature enhances accessibility and provides greater granularity over investments.
Security tokens vs Cryptocurrency
Cryptocurrencies and security tokens are nearly identical. However, it is important to note that security tokens are not the same as cryptocurrencies. A cryptocurrency is intended to be used as currency, money, or a form of payment.
A security token is designed to be used in the same manner as a stock, bond, certificate, or other investment assets. Security tokens and cryptocurrency, on the other hand, are both created and stored on a blockchain.
Bitcoin, Litecoin, and Ethereum are all based on their own blockchains. Security tokens, on the other hand, run on an existing blockchain, which could be the Ethereum blockchain. They are both tokens, but the key distinction is between their purpose, intended use, and actual use.
The Ethereum blockchain is most commonly used to deploy security tokens. Many businesses use ERC-20 tokens, which are Ethereum-compatible tokens that can be executed using smart contracts on the Ethereum blockchain.
Many cryptocurrencies have been introduced that were never meant to be used as investment vehicles. When Bitcoin was listed on cryptocurrency exchanges, for example, investors and traders discovered that they could earn significant returns. As a result, investors regard Bitcoin as a security token, despite the fact that it was never intended to be one.
Ether, Ethereum’s native token, was created to be used to pay transaction fees on the Ethereum network. Ether is a cryptocurrency in that sense. Investors regard it as a security token because it is traded on exchanges and held for its increasing value.
Although holders of security tokens can profit from the token’s performance. They can sometimes earn profits through dividends in the form of additional tokens, and they frequently receive other benefits such as voting power. As a result, holders of security tokens can reap many of the same benefits as stockholders.
Is Bitcoin a security token?
Bitcoin is a type of digital currency that many people use as a speculative store of value. It is decentralized, which means that no single authority controls it. Instead, Bitcoin is powered by thousands of computers spread across the globe.
Bitcoin is clearly not a security token. Bitcoin, unlike tokens, is a native coin on an existing blockchain that can be used for daily transactions. Bitcoin, unlike a security token, does not represent ownership outside of itself. Furthermore, because there is no third party that “owns” or is directly responsible for Bitcoin, it does not qualify as a security token.
While security tokens and cryptocurrencies like BTC and ETH are nearly identical, the key distinction is in their purpose and actual use.
What is a Security token in Cryptocurrency: Conclusion
A cryptocurrency is intended to function as a medium of exchange on a blockchain, whereas a security token is intended to function similarly to a bond, stock, or other investment assets.
Some traditional investors are more comfortable investing in cryptocurrencies that meet SEC standards; however, if more cryptocurrencies qualify as securities, they will be required to comply with SEC mandates. Because many in the cryptocurrency industry advocate for decentralization, some see increased SEC oversight as a threat to Web3’s future.
While security tokens provide a novel way for investors to gain access to a variety of financial services, they can complicate regulation in the cryptocurrency industry. It will be critical for those involved in cryptocurrency to keep a close eye on how agencies like the SEC define security crypto tokens and take appropriate action in their situation.