Security token meaning

A security token is a digital asset issued on a blockchain that represents a traditional security like a stock or bond.

What Is a Security Token?

In the context of crypto, a security token is a digital asset that derives its worth from a tradable external asset. Also known as “equity tokens” or “investment tokens”, security tokens can represent company shares, equity, real estate, options, and ETFs, among other real-world assets (RWAs). 

Security tokens are useful for representing fractional ownership, where users can own a piece of an asset rather than the whole thing. This allows holders to gain profits based on the token’s market performance or the value appreciation of the company issuing the token.

How Do They Work?

Unlike cryptocurrencies like Bitcoin and Ether which also get traded on marketplaces, security tokens do not contribute to a blockchain ecosystem’s internal economy and are purely speculative assets. The utility that they offer holders is simply to represent their ownership rights in the underlying asset. As a result, security tokens are subject to the same financial rules and regulations as traditional securities.

Early-stage businesses or projects issue these tokens as tokenized shares to investors during Security Token Offerings (STOs), a public fundraising event that involves the distribution of digital securities. Besides giving holders ownership rights, tokenized shares make them eligible to earn dividends and interests, or invest in properties and other digital assets.

While they benefit from strict government regulations that help prevent fraud, these tokens also leverage the properties of their underlying blockchain. As a result, they offer users transparency, unlimited uptime, rapid settlement, and divisibility. 

Examples of security tokens include Steelcoin, tZero, bNVDA, and Blockchain Capital (BCap).
To understand how security tokens differ from governance tokens and utility tokens, check out this article from Ledger Academy.