The Beginner’s Guide to Security Tokens
Security tokens are a unique class of virtual currency that has grown in popularity in recent years. Also known as utility tokens, these are digital assets intended to be traded in exchange for fiat currencies (government-issued currencies) or even other cryptocurrencies. They represent ownership rights in a company, in the form of shares or interests in real estate.
The concept behind security tokens is simple. Instead of buying or owning shares in a company, you could instead buy shares in a token representing a share. The token is given value by what is underlying the token. For example, if an underlying asset is gold, then the value of a token representing that gold would be tied to its market price.
What are Security Tokens?
Security tokens, also known as digital securities or crypto tokens, are an emerging form of investment rapidly gaining traction. They are digital representations, representing the ownership of real-world assets. For example, a security token may represent a piece of real estate or a financial instrument.
They may sound similar to cryptocurrencies, but, they are different from Bitcoin, Ethereum, or any other crypto coins for that matter, as the latter serves as the mediums for exchanging value. Security tokens, on the other hand, are designed to allow investors to trade their shares on secondary markets and for the issuer to manage these shares in a centralized or decentralized way.
Do You Need to Use Security Token?
Security tokens are a form of cryptocurrency representing traditional assets like stocks, bonds, real estate, or intellectual property. However, unlike traditional cryptocurrencies, security tokens are backed by real assets and are compliant with securities regulations like SEC. That being the case, since security tokens represent real-world assets, it opens up a wealth of possibilities for anyone who wants to trade or invest in them.
Here is the Advantage of Security Token:
Transparency
Security tokens are digital assets that give you the title, rights, ownership, or interest in a real-world asset. They can also offer access to company equity, real estate, consumer goods, and more. Interestingly, the security token market is expected to exceed $100 billion by 2022.
For a company, they are an opportunity to increase the transparency of asset ownership to an investor base that is used to traditional security offerings.
Speed of The Transaction
Many banks, mutual funds, and stock exchanges are now using security tokens to ensure security. Not only that, but even businesses, shareholders, and customers can all be registered on the blockchain.
As cryptocurrencies continue to gain attraction around the world, many companies are actively looking to bring them to mainstream use. A security token offering (STO) is a new form of crowdfunding that involves issuing security tokens to investors in place of traditional shares. This process can potentially improve many aspects of crowdfunding, from the speed of transaction and the cost of funding to the required transparency and compliance.
Raising Capital
A security token is a virtual representation of an asset-backed by another asset. Blockchain technology helps tokenize assets, giving an investor a much safer way to trade than using a centralized exchange.
Security token offering is a method of raising capital by selling digital tokens representing ownership over real assets. It is not the same as ERC20 token-based initial coin offering (ICO). With security tokens, investors purchase tokens representing ownership in a company, product, or asset, whereas, with ICOs, investors purchase digital tokens.
Divisibility
Divisibility is a characteristic of a currency that can be divided into smaller units, making it easier to manage and track. In the traditional setup of securities, the transactions are secured by a central body. The central body verifies the transactions, validates them, and issues a certificate. If something goes wrong, it can also be challenged. However, with security tokens, there is no central body to authenticate the transactions, which raises the question of who disputes the transaction. To resolve this, the tokens issued are divisible. In other words, it is divisible into smaller and smaller bits until it cannot be further broken into smaller parts.
Security tokens are digital assets that can represent and secure real-world assets, such as real estate or business stocks, as well as financial assets, such as bonds and investment funds. Besides, they also function as financial utility tokens that can facilitate peer-to-peer transactions, trade on cryptocurrency exchanges, and represent ownership rights.