Security tokens inherit blockchain benefits such as transparency, instant settlement and 24/7 availability
There are three main types of security token: equity, debt and asset-backed
As security tokens act like traditional securities this allows governments to apply the same regulations
New legal frameworks are facilitating security token trading on regulated exchanges
The compliant face of cryptocurrency
Blockchain technology supports the creation and distribution of multiple types of token. While the blockchain itself treats these token types as pretty much identical, their function and intended utility defines how they are viewed and regulated by the authorities.
Bitcoin was the first blockchain-based token, and represents a payment token or ‘pure’ cryptocurrency, designed to replace the usage of the sovereign currencies we are all familiar with.
Later came the Ethereum blockchain, which sought to improve on the functionality of Bitcoin, adding features such as smart contracts. Ether is the utility token of this ecosystem and must be spent to access its features and services.
In the ICO (initial coin offering) boom which followed, a deluge of copycat ‘coins’ were created, although some had little actual utility and were simply being sold as a speculative investment.
As such many were later deemed to be mis-sold (and unregulated) securities and faced hefty penalties. Hence the earliest ‘security tokens’ had the label applied against their will and often with no real product to show.
However, newer projects embraced the opportunity and increased legitimacy of working with the authorities to create token offerings which were compliant with securities regulation, and the true security token was born.
Intended to be used as a currency, for making payments, buying and selling products and services, and transfer of value
Designed to be used within a particular platform, often needing to be held or spent to access features and services of the ecosystem
Denote ownership of, or equity in, a traditional security such as stocks, real estate or precious metals
Represent ownership or unique or rare assets, such as art, collectibles, vintage cars or entire apartments