What Is A Security Token?

The term “token” is commonly used to refer to cryptocurrencies. However, a token can be many things and cryptocurrencies are only the first widely embraced use for them.

The blockchain technology behind tokens has proven to be useful across several industries and one of the most impactful uses in the financial world so far is security tokens.

A security token is a regulated security, much like stocks. However, blockchain technology provides much greater flexibility, giving security tokens many unique benefits and capabilities that aren’t possible with traditional securities. 

How it Works

A security token can represent fractional ownership in virtually any type of asset, such as equity in a company, commercial real estate, fine art or even classic cars.

The issuer fractionalizes the asset into a set number of tokens and sells these tokens to investors through a regulated offering. The process is actually quite similar to how issuers currently sell equity shares in a company through a stock offering.

However, the use of blockchain technology removes several hurdles in the process and allows for much more flexibility in the types of securities that can be offered. 

Benefit to Investors

One of the most appealing aspects of cryptocurrencies has been the flexibility they provide. Any number of tokens, or fraction of a token, can be traded at any time. Transactions aren’t limited to market hours and they’re processed instantly with a transparent record.

However, this flexibility can come with risk because of the lack of clear regulation over the cryptocurrency market. Many cryptocurrency companies operate outside regulation. Several investors have fallen victim to rug pulls, where the developer of a cryptocurrency suddenly abandons the project and runs away with the funds.

Others have invested in what appears to be a trending cryptocurrency only to see the value suddenly plummet because of a manipulation maneuver called a pump-and-dump.

Security tokens, on the other hand, come with the protection of being regulated securities. While all investments have some level of risk, security tokens representing regulated securities give investors a greater level of comfort because they are inside the regulated marketplace.

Security tokens can also come with unique benefits that aren’t possible with traditional securities. This could include receiving discounts on products or services when paying with the company’s security token or gaining exclusive access to product launches and events.

Benefits to Issuers

Companies have traditionally had limited options when it comes to raising capital, and limited options often means not having enough leverage to receive acceptable terms.

Security tokens allow companies to raise capital from a wider range of investors. Instead of being forced to accept the terms offered by private equity or venture capital firms, a company can also extend the offering to retail investors.

The flexibility that security tokens offer also allows companies to structure securities in a way that fits the unique needs of the business and the investors. Companies can issue tokens that represent equity or simply share a percentage of profits. Security tokens can even be created in a way to incentivize investors to become customers or clients.

The possibilities are practically endless for how a security token can be structured. To learn more about this emerging asset class and the company leading the charge to help make it available to more investors, visit INX.CO.

Photo by Shubham Dhage on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.