The utilization of tokens is one of the many important factors that have contributed to the success of blockchain technology. The term “Blockchain” itself can be perplexing, as can its terminology. The majority of individuals consider tokens, coins, and cryptocurrencies to be identical. However, each has a unique function that is distinct from the others.
What Are Crypto Security Tokens?
Crypto security tokens are blockchain-based tokens that represent financial securities. Traditionally, securities in the financial markets refer to financial instruments such as stocks, bonds, and options. Security tokens are a digital representation of these instruments. As such, security tokens may include benefits such as owning dividends, voting rights, or interest payments.
The management of crypto security tokens using smart contracts means their processes are automated. During the development phase, the issuing company will set the conditions within the smart contract. The requirements include aspects like the ownership rights afforded to the token’s holder. Despite the limited regulatory framework governing the blockchain industry, security tokens are subject to stringent rules as they are regulated by securities law.
Common Types of Security Tokens
While security tokens can be structured in different ways, the three most common types of security tokens include real estate tokens, equity tokens, and debt tokens.
- Real Estate Tokens: Holders of real estate tokens enjoy ownership rights to real estate investments, enabling investors to have fractional ownership in real estate properties.
- Equity Tokens: Equity tokens are the blockchain version of shares in a corporation, with the method of recording ownership being the distinguishing factor. While ownership records of traditional shares are documented in a centralized database, and the owner is issued a certificate, equity tokens involve keeping records on a public blockchain.
- Debt Tokens: Represent debt instruments such as corporate bonds. In the smart contract, the interest rate, the debt’s maturity, and other factors are coded into the token.
Advantages of Crypto Security Tokens
- Increased Access to Capital: Projects wishing to raise funds can access a global network of investors.
- 24/7 Trading: Unlike traditional securities markets that operate during business hours, security tokens are always tradeable.
- Fractional Ownership: Traditional markets may lock out investors who don’t meet certain thresholds. Fractional ownership breaks down assets into smaller units to increase market access.
Disadvantages
- Changing Regulatory Landscape: Given the everchanging regulatory landscape regarding blockchain technology, there is always a possibility that what’s legal today will not be legal tomorrow.
- Limited Accessibility: The extra scrutiny on security tokens from regulators places strict conditions on who is eligible to invest.
- No Security Guarantees: Malicious actors can exploit the vulnerabilities in the smart contracts.
Security tokens are a promising innovation that combines the best of traditional finance with the transformative power of blockchain technology. By providing investors with increased liquidity, fractional ownership, transparency, and reduced transaction fees, security tokens are redefining the investment landscape.
[Source: Unchainedcrypto – Image: Finect]
