In contrast to utility tokens, we have security tokens. These tokens derive their value from an
external, tradable asset and are subject to federal securities regulations. Understanding the
definition and characteristics of security tokens is essential for investors looking to delve
deeper into the world of cryptocurrency.
Definition of Security Tokens
Security tokens, also known as tokenized securities or investment tokens, represent ownership
in a real-world asset such as a company, real estate, or other forms of investments. They are
often used in the context of an Initial Coin Offering (ICO) or Security Token Offering (STO),
where they are sold in exchange for legal tender or other types of cryptocurrencies.
Unlike utility tokens, which provide access to a specific product or service, security tokens
provide the holder with an ownership interest in a company or asset. This means that security
tokens can provide investors with a range of financial rights, such as dividends, profit sharing
rights, or even voting rights in the company.
Characteristics of Security Tokens
Security tokens have several key characteristics that differentiate them from utility tokens:
1. Asset-Backed: Security tokens are backed by real-world assets. This could be
anything from a share in a company, a piece of real estate, or any other form of
investment.
2. Investment Intent: Unlike utility tokens, security tokens are explicitly designed as
investments. Investors buy security tokens with the expectation that they will increase
in value over time.
3. Regulated: Because they are considered securities, security tokens are subject to
federal securities regulations. This means that the issuance and trading of security
tokens must comply with these regulations.
4. Ownership Rights: Security token holders often have ownership rights in the
company or asset that the token represents. This could include voting rights, dividends,
or profit sharing.
5. Tradeable: Security tokens can be traded on secondary markets, providing liquidity to
investors. This is a key advantage over traditional securities, which can be difficult to
trade.
In the next section, we will compare utility and security tokens, highlighting their key
differences and similarities. This will provide a comprehensive understanding of these two
crucial components of the cryptocurrency market.