Security Token is the latest buzzword in the world of cryptocurrency. The Blockchain Technology is ever-changing and with Security Tokens being the new trend, investors are given a new way to invest their money in companies. In this article, we’ll discuss about security tokens and what makes them special.
What is security token?
Security tokens are tokens distributed to investors via STO or Security Token Offering. It can also be purchased through ICOs or Initial Coin Offering. A security token is a digital asset issued using blockchain. It is used to represent mainly a company’s financial security.
Through STOs, companies now have a new way of raising funds. Aside from doing IPOs, a company can also distribute security tokens through issuance of a regulated digital share of equity. Security tokens are interesting and are backed by tangible assets like fine art, company shares or even real estate.
Unlike other tokens created through smart contracts, security tokens are most of the time subject to federal security regulations. It’s highly important that security tokens adhere to security laws and regulations in jurisdiction where they are listed. Otherwise, companies will face the risk regulatory inquiry.
Why is there a need to tokenize security?
The main idea behind security tokens is to back an asset. A security token is used to represent a share in a company including interest in a fund. When an investor buys security tokens, he or she essentially buys a membership in a company of his choice. One very significant aspect of security token is that it serves as investment contracts an assurance for dividends and profits on offer.
Through tokenization, private securities become tradable. It also eliminates the administrative burden of traditional private securities. It brings liquidity to private assets, making any security token truly promising. Some assets like fine art and real estate are illiquid but thanks to the idea of tokenization, they can now be tokenized into a security asset to be divided into proportions anyone can afford. The same is true for tokens backed by company shares.
Having features and protections of traditional assets while leveraging benefits of being digital assets, security tokens are more regulated and need to be approved and licensed by SEC and other regulatory bodies. Being a fundraising vehicle, tokenizing security allows companies to raise capital without having to depend too much on investment banks and other institutions.
Why investors prefer security tokens
We know what happened in 2017, when there was huge excitement about ICOs. While smart contracts changed the landscape of cryptocurrency, it was also marred by scams, hacks, developers’ mistakes and other things. While lack of regulation appealed to most investors, it also served as crypto’s weakness. Given that security tokens are regulated by SEC and other regulatory bodies, investors are able to invest in a project without worrying about being scammed. It’s the stigma that haunted cryptocurrency in the past.
But cryptoassets are already coming of age and crypto boom is inevitable. It’s up to investors how they can make the most of their money. As security tokens holder, an investor’s only concern is the financial success of the company, whether it will be successful and whether it will survive the tough competition
in its niche. Indeed, owning security tokens is like owning company shares but it’s actually a lot better than traditional security. Holding security tokens offers more flexibility as investors have more autonomy and freedom over their holdings.
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