What Are Security Tokens, and Why Do They Exist?
Security tokens are securities that have been tokenized. They are blockchain-based digital versions of traditional securities. These tokens might be used to represent ownership of a portion of any valued asset, such as a car, a piece of property, or stock in a company.
Entering the cryptocurrency world might resemble unlocking a mystery door that drops you into a parallel dimension where nothing makes sense and individuals appear to be speaking your language but where all the words have different meanings. This guide serves as a decoder ring and has been covered.
Tokens are very common in the world of blockchain and cryptocurrency.
Cryptocurrencies are frequently referred to as “tokens.” Cryptocurrencies are merely the first widely accepted application for tokens; nevertheless, a token can be many different things.
Security tokens have so far been one of the most influential uses of the token-enabling blockchain technology in the financial sector.
Coins vs. Tokens: What’s the Difference?
Although both tokens and coins fall under the umbrella term “cryptocurrency,” they are not the same thing.
A token is used to denote a certain form of non-cash assets, such as a share of ownership, unique blockchain privileges, like voting rights, or early access to a product created by the entity issuing the token.
On the other hand, coins are solely used to signify money. A coin always has a certain cash equivalent determined by market forces and demand. Although tokens may be valuable, their existence is not limited to serving as a means of value transfer. Usually, they’re made for anything more complex than a straightforward financial transaction.
What is a Security Token?
Security tokens are digital contracts that, like stocks, specify fractional ownership in an asset. This is why many people in the traditional finance (TradFi) industry find security tokens alluring. They act as an entry point for many knowledgeable investors into cryptocurrencies and DeFi.
The securities in question are typically shares of the company issuing the token as a form of investment in long-term expansion. They are subject to the same regulations as securities in more conventional markets.
An important feature of most security tokens is the ability to have some say in what happens with the company that issued them. You effectively become a significant shareholder when you purchase a security token, and the value of the firm directly influences the value of your investment.
On the other hand, the value of a cryptocoin is determined by the demand for a specific coin and by the confidence other users have in the platform (of which you are now an owner).
How Are Security Tokens Different from Utility Tokens?
Though security tokens are kind of a security, other tokens aren’t the same. Utility tokens are the most popular type of the token issued during an initial coin offering. They are akin to “golden tickets” than ownership stakes in the business. They grant holders access to unique services or preferential treatment, such as a discount when a start-up’s product line is launched. These products could be software packages or software as a service platform, for example.
Utility tokens aren’t regarded as investments because they function more like advertising tools and don’t give holders ownership stakes in businesses. If the thing your token represents suddenly becomes incredibly popular in demand, utility tokens may increase in value. If your token is a limited access pass, for instance, those that haven’t been redeemed yet may increase dramatically in value among individuals who missed the ICO.
How Do Security Tokens Work?
Most security tokens function on the Ethereum blockchain, just like utility tokens. However, they are also supported by other blockchains that support smart contracts. The tokens can come in various forms, from shares of ownership in a company, work of art, a piece of intellectual property, or any other asset.
Security tokens are created in the same manner by most companies. A business will issue a security token representing a company’s stake. The investors who will be allowed to buy those tokens are then added to a whitelist of cryptocurrency wallet addresses.
To get whitelisted, potential investors must prove their compliance with any rules and requirements put on that security. This involves compliance with KYC (Know Your Customer) and AML (Anti-money Laundering). While it is impossible for a security token to incorporate all of the rules of many countries and jurisdictions into its protocol, businesses can abide by most rules by limiting who can purchase and possess the token.
The majority of users can trade security tokens pretty much as they want when trading through a counterparty that is whitelisted. Some of the earliest exchanges created for this kind of activity were Open Finance, Blocktrade, and tZero.
You’ll need a crypto wallet and an account on an exchange that trades security tokens in order to buy or sell security tokens, just like you would when investing in cryptocurrencies or utility tokens.
6 Benefits of a Security Token
Security tokens give access to assets at affordable costs while still adhering to established financial guidelines. This provides greater opportunity for small-scale investors while maintaining security.
Security tokens also offer the following advantages:
1.) More Compliance
Currently, one of the most frequent reasons for trade friction is national rules.
With automatic compliance, security tokens can reduce, if not completely eliminate, this issue. They can make sure that transactions adhere to location-based rules because of blockchain technology. Investors can integrate applicable laws into the security tokens’ architecture.
2.) Enhanced Transparency
Security tokens are easily tracked and verified because they are published on a blockchain. Before buying the tokens, investors can review the issuer’s background and transaction history. Since all involved users have access to information, accountability is ensured, credibility is established, and fraud risks are decreased.
3.) 24×7 Trading
Security tokens are not constrained by regional boundaries or time zones, allowing for round-the-clock trading. This is a really important benefit. Consider the stock market’s time-bound nature.
The only days the stock market is open are weekdays. If a significant incident takes place over the weekend, shareholders won’t be able to react to it until Monday. Investors can respond quickly to news developments because of the security token’s 24/7 access.
This will improve their trading opportunities while also enabling them to cut down on their losses.
4.) Better Cost Efficiency
Trading real-world assets require time, has significant risks, and incurs a number of additional costs. Security tokens can reduce the risks and streamline the procedure. They can reduce the requirement for supervision, eliminate the possibility of human error, and remove the likelihood of non-compliance with location-specific regulations.
5.) Asset Interoperability
The deployment of security tokens on a large scale could encourage asset interoperability. Keeping different asset types, like T-Bills and constructing claims, in a single hardware wallet on compatible blockchain-based systems is like having interoperable assets. Transactions may be greatly streamlined as a result.
6.) Quick Settlement
Settlement is referred to the time at which ownership of an asset is transferred. It is determined by the time the ownership documentation and payment are complete. Security token settlement normally takes a few minutes because security tokens are backed by blockchain. It differs greatly from the usual several-day waiting period for ordinary transactions.
Popular Security Token: Examples
The market for security tokens is growing every month. With a market cap that ranges from a few thousand dollars at the bottom to well over $200 million at the top, there are currently well over 100 security tokens. And this list will continue to expand as more STOs are scheduled to commence. According to market capitalization, the top security tokens include the following:
1.) Exodus ($EXOD)
The well-known owner of the secured Exodus cryptocurrency wallet/platform is Exodus Movement Inc. The corporation is situated in Nebraska, and the Algorand blockchain hosts its security token. The market capitalization of the $EXOD token, which is traded on the Securitize platform, is around $48 million. Ownership of Class A Shares is transferred to token holders by Exodus.
2.) tZERO ($TZEROP)
In 2017, Overstock, an online retailer, launched the tZERO blockchain with an initial coin offering (ICO) for the native $tZEROP token. The crypto token has developed over time and is now used as a security token that distributes shareholder dividends. International accredited investors may invest in it, and each quarter they receive 10% of Overstock’s adjusted gross revenue. The token’s market cap in 2022 is about $60 million.
3.) Blockchain Capital ($BCAP)
Blockchain Capital, a VC firm specializing in cryptocurrency, was established in 2013. The business is headquartered in San Francisco. The first security token ever introduced was $BCAP, which debuted in 2017. Its market valuation of $80 million makes it the third largest security token as of 2022. The token portfolio, which trades on the INX securities exchange, consists of a combination of digital currencies, common stocks, bitcoin, and network equity.
4.) Overstock Token – ($OSTKO)
Major online furniture retailer, Overstock is headquartered close to Salt Lake City, Utah. On its tZERO blockchain network, the company introduced a security token with a market cap of about $174 million. The $OSTKO cryptocurrency is given to shareholders who own Overstock shares as dividends. One token was given away for every ten shares that the owner owned.
5.) INX Token ($INX)
INX, a well-known name in the cryptocurrency trading community, runs a number of platforms devoted to cryptocurrencies and other digital assets. Both institutional and retail investors can use their investment products. With a market cap of about $240 million as of Q1 2022, the INX Token is the most valuable security token. On the basis of positive net operating cash flows on the INX platform, it offers holders an annual 40% dividend.
How to Invest in Security Tokens?
Individuals interested in investing in security tokens should begin with an STO platform. Investors can purchase and sell tokens on these exchanges just like they would buy and sell stocks or any other type of investment.
Through blockchain technology, initiatives like The Elephant, Funderbeam, and Causam Exchange aim to combine the traditional and cryptocurrency markets and make financial markets more widely available than previously.
In conclusion, security tokens hold a lot of potential even though they are currently underutilized. The long-term trend is evident: as the hype surrounding security tokens continues to grow and some existing tokens are reclassified, there will certainly be many more security tokens coming to market in the coming years.
Ultimately, working with security tokens is a topic where a little information goes a long way, as with other cryptocurrency-related concerns. Understanding the distinction between a utility token and a security token, as well as the reasons why so many investors are so interested in a security token, is a wonderful place to start.
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