What Are Security Tokens in Crypto?
Security tokens are crypto assets that encapsulate rights of ownership, stake, or rewards within the blockchain. They also carry the value of a specific tokenized asset, item, or property.
Tokenized securities are the most prevalent form of security tokens. Organizations from the conventional finance sector are migrating their stocks, bonds, and other liabilities to the blockchain, leveraging the benefits of this cutting-edge technology. This transition is carried out fearlessly, given that the existing securities laws apply to these tokenized securities, ensuring compliance.
However, security tokens encapsulate more than just traditional financial instruments transposed onto a peer-to-peer network. They can also represent fractional real estate, income distribution agreements, works of art, intellectual property, and so on.
Security tokens are brought to life using smart contracts and can be forged on fresh blockchain standards, thus enabling their coding based on principles never used before, complete with distinctive characteristics and functions.
As such, security tokens can pave the way for novel forms of investments, property rights, and methods of possession, not necessarily confined to the financial market.
One notable company providing platforms for the creation of security tokens is Polymath. They specifically devised the ERC-1400 standard and the Polymesh blockchain for these digital assets.
Security Tokens vs Tokenized Securities
Although security tokens are frequently referred to as tokenized securities, these terms should be differentiated for a more thorough understanding of the cryptocurrency market.
Noelle Acheson, the former Head of Research at Genesis Trading, notes in her blog that security tokens represent a more contemporary concept of digital assets than tokenized securities.
Security tokens can pioneer a novel approach to financing, engagement, rewards, or governance. They act as a form of user assurance, deployed on the blockchain.
On the contrary, tokenized securities are time-tested financial tools that have evolved into a digital format and migrated onto the blockchain to broaden their market reach. They have become more user-friendly, liquid, and transparent, offering increased flexibility and enhanced regulation. Importantly, they maintain the same operating rules as they did in their original form.
Why is it important not to conflate these terms?
Primarily, it relates to regulatory oversight. As we have determined, tokenized securities are digital counterparts of recognized financial instruments, and as such, they adhere to an existing set of rules and laws. Regulatory bodies are typically uninterested in them. However, this is not the case for other security tokens, which could fall under regulatory scrutiny if they represent something novel that doesn't meet established securities requirements.
Migrating stocks and bonds to the blockchain helps traditional investments adapt to current realities, but this doesn't necessarily spur the cryptocurrency market into a new phase of transformation. Conversely, security tokens could indeed serve as catalysts for growth, a potential that is currently constrained due to legal uncertainties.
If the appropriate legislative framework is established, this form of crypto assets could incite changes in existing investment and collaboration paradigms.
