In blockchain terms, a security token is a piece of data recorded across a distributed ledger which stores contractual information similar to that found on securities certificates.
Security tokens function as securities – tradable, fungible contracts which represent equity (in the case of equity tokens), debt claims (in the case of blockchain bonds) or underlying assets (in the case of derivatives). A security token can be used in much the same way as other securities.
The difference between a security token and a conventional security is that the contract information is recorded in a block on a blockchain. Conventional securities are recorded on physical or digital certificate maintained by a service provider.
Because security token transactions are largely automated by blockchain technology, the administrative efforts and costs of transactions are lower than those of conventional securities.
Unlike the blockchain coins sold to investors during an initial coin offering (ICO), security tokens are contracts and represent real assets. ICO tokens have utility value based entirely on supply and demand for the tokens themselves. Security tokens are typically registered, meaning the identity of their owner is included in the contract. Most tokens sold through ICOs are not contracts and are not registered to a specific owner.
Like conventional securities, security tokens may entitle their holders to rights, such as voting rights and/or rights to dividends or interest (see: cum rights). These rights are defined in contracts corresponding to security tokens.
In 2018, the SIX Swiss Exchange announced the development of the SIX Digital Exchange. This exchange will provide a regulated marketplace for security tokens.
Security tokens are offered by companies to investors on the primary market through security token offerings (STOs). Equity tokens – security tokens which represent equity – are offered to investors by companies via equity token offerings (ETOs).
More on this topic:
Guide to investing in ICOs
Swiss online trading comparison
