If you have a basic idea of blockchain technology and the way it works, you might have some knowledge about utility and security tokens that operate within blockchain. Here are seven things you should know about security tokens.
What is a Security Token?
A security token is similar to securities which promise monetary value in form of profit sharing, dividends, or any other mechanism. In blockchain, a security token refers to ownership of this security attached to a cryptographic token.
What Is The Current State Of Security Tokens?
Currently, most tokens used in blockchain based technology are considered utility tokens. They are used to circumvent the majority of the SEC (Securities and Exchange Commission) regulations and raise millions of dollars in ICOs. However, according to SEC, most tokens used in blockchain transactions are considered security token and not utility tokens. The reason for such observation is the commission looks towards tokens on how they are used and not at the way they are intended to use. Hence, a large number of existing token have to be shut down or restructure. The new ICO have to restructure their utility tokens as security tokens as most people primarily invest in ICO in anticipation of future profit.
What Is The Difference Between Utility Tokens And Security Tokens?
As mentioned earlier, utility tokens present the investor future access to the products and services of the list of blockchain companies whereas the security tokens represent an investment in a company. The holders of security tokens have ownership rights in the company. The investors have bought security tokens with the expectation of future returns in the form of revenue share, dividends, or price appreciation.
How to Identify Security Tokens?
You need to use a test to distinguish between utility tokens and security tokens. Here are some questions you must ask.
Is the blockchain company selling the token as an investment?
Is there an investor on whom you can rely on?
If the answer to both questions is yes, the token in question is a security token.
What Are Security Token Regulations?
Since there are several questions unanswered related to cryptocurrencies, there are no definite security token regulations. However, the government considers security tokens equivalent to securities and hence some rule of securities apply to security tokens. In most cases, security tokens are required by the complete list of blockchain companies to abide by the security laws of the base of operation else they risk the wrath of government regulators.
What Are The Advantages Of Security Tokens?
Unlike traditional investments, security tokens come with some unique advantages. Some of them are
Cost-effective– Security tokens eliminate the need for intermediaries which cuts down the cost of service delivery. As such, the administrative cost of buying and selling security tokens is zero.
Fast– AML and KYC checks of Security tokens are automated which makes the selling of security token to accredited investors fast.
Global – The security tokens are eligible for global trading depending on the ICO setup and the blockchain company issuing it. This means as long as you have a cryptocurrency wallet, you can trade security token any place in the world.
SEC compliance– Since security tokens are SEC compliant, investors don’t have to worry about breaking laws by investing in Security tokens.
What Are Security Token Issuance Platforms?
Some of the popular platforms for the issuance of security tokens are:
Polymath – It is a blockchain based platform dedicated to creation and use of security tokens. The platform is SEC compliant which facilitates the buying and selling of security tokens.
Harbor – It is an Ethereum ERC20-based protocol that works to create security assets that can be legally traded on crypto asset exchanges
Open Finance– It is focused on building a security exchange and has partnered with Harbor as their protocol of choice to achieve their goals.
These are important things to know about security tokens.
Neha Nidhi
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