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If you’re familiar with cryptocurrencies, there’s no way you haven’t heard of the blockchain technology. The blockchain tech – which is the underlying technological architecture behind most cryptocurrencies today, is probably one of the fastest-growing technologies till date, as it has already managed to surpass the cryptocurrency industry and is being deployed across many other industries, both financial and otherwise.
The blockchain tech was introduced as we know it today back in 2009, when the infamous Satoshi Nakamoto launched the very first cryptocurrency Bitcoin. After the rise of ICOs (Initial Coin Offerings), where various organizations sell crypto so as to fund specific operations or any further developments, there are many, many kinds of different cryptocurrencies out there.
Security tokens are quite similar to these ICO-generated tokens at a glance. Security tokens are distributed through Security Token Offerings or STOs. So if you’ve ever wondered how to invest in security tokens or participate in security token exchanges, STOs would be a good place to start.
A security, as you might be aware, refers to a financial instrument that has some value and that can be traded. Many of the traditional financial instruments, such as stocks, bonds, and options, are good examples of securities. Security tokens, simply put, represent these various securities.
2021 is shaping up to be the year when security tokens rise up as one of the most successful use cases of the blockchain technology so far. In this post, we try to answer all your questions regarding what is a security token crypto, what are security token exchanges, and more.
What's in this post
A security token crypto is based on a blockchain platform, and that usually represents a stake in a particular organization or even a valuable asset. Security tokens are distributed generally by entities like various businesses and even governments.
Security tokens serve as a bridge between the virtual cryptocurrency and real world finance. They strike a good balance between the two worlds, with digital, liquid contracts for fractions of tangible assets that possess value, like company shares, or assets like a house, a car, or a valuable enough painting. These security tokens serve the same purpose as their underlying assets.
In crypto, security tokens are primarily designed to assign, validate, and ensure ownership rights with the help of immutable blockchain records. They act as value-transfer instruments for an asset, an asset bundle, or a set of rights. As for the features of security tokens, they have all the usual characteristics and benefits of your regular crypto tokens, with the distinction that these crypto tokens can be programmed with unique properties and features, and the various regulatory requirements and protections of the securities they represent also passes on to them.
To see an example of a security token, let’s assume company X wants to give away some shares to investors in a digital, tokenized form. So they can design their security tokens to hold all the benefits investors can expect from the shares they represent, like voting powers and dividends.
When you try to understand what is security token, it’s quite easy to mix them up with tokenized securities. So, let’s see the differences between the two next, shall we?
As the world around us gradually takes up the digital road and the blockchain technology gets adopted more widely, it’s very likely that you might think of the concepts of security tokens and tokenized securities as interchangeable. To truly realize why they are not, in fact, similar, it’s important to first know what exactly the terms define.
Tokenized securities and security tokens are indeed both digital assets, albeit of different types. Tokenized securities are relatively simple when it comes to both their forms and their operations. A tokenized security is simply a virtual avatar of a traditional security, and its sole purpose is to widen the security’s market reach and magnify its market liquidity as well. These tokenized securities don’t function much differently to the off-chain, real-world securities; the only real difference is that the tokenized securities can be stored on and swapped out through a blockchain network.
Security tokens also serve as value-transfer financial instruments and combine the digital aspect of crypto assets with real world valuables. However, in cryptocurrencies, security tokens have the DLT or the Distributed Ledger Technology backing them, so they have exclusive characteristics coming off the particular design for each of the tokens. Therefore, the one thing crypto security tokens have but tokenized securities do not is the programmability factor.
Moreover, security tokens go through a heightened standard of regulatory survey, since as mentioned before – they are basically the digital counterparts of their underlying financial securities, so they have to be created, exchanged, and processed according to the regulatory measures in the region they are meant to be issued and sold off in.
Now that we have the basics of crypto security tokens, let’s now take a look at the various beneficial characteristics of these tokens.
Since it’s already been established that security tokens are not that different from the usual blockchain powered crypto assets, you might have already realized that security tokens benefit from the various advantageous properties of the blockchain. Below, we round up some of these features of blockchain security tokens borrow:
Now that we have gotten that out of the way, we’ll be taking a closer look at how the crypto security tokens are transforming the way we have traditionally transferred value over the years.
Now that you know the basics of security tokens, you might ask why you should buy a security token or participate in a security token exchange instead of just buying the asset they represent or simply a traditional equity stake in a business. Well, firstly, these security tokens are transparent, trustless, and of course, programmable – so you can infuse them with any qualities as per regulatory mandates and there’s a broad scope for innovation on your part. The security tokens can be therefore programmed to have more use cases than a regular company stock. Plus, with the help of the blockchain technology, these security tokens can be very easily transferred, reassigned, traded, and traced than the tangible assets they stand for.
So, it’s clear that security tokens have implications not only within the financial space, but also in other industries and situations where an asset of significant value is being traded.
In the financial markets, security tokens can help with the following:
In conclusion, crypto security tokens possess the potential to completely transform the way value is transferred in financial markets and beyond. So far, security tokens haven’t exactly seen widespread adoption. But in the coming times, security tokens are fully expected to play an integral role in making financial markets far more efficient and inclusive, as well as allow developers to create yet unseen forms of value creation. We at Delta Exchange are very excited to see where the security tokens are headed next!
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