Security Tokens: the 1o1 guide

Blockchain is about more than cryptocurrencies. Today let’s look at security tokens, an investment tool growing in popularity for art sales, real estate and other markets. We’ll learn what they are, how they differ from cryptocurrency, and their advantages to investors. 

What is a security token

To understand security tokens, you must learn a little bit about blockchain. 

Blockchain is an infinitely growing list of transactions on the cloud, protected by a high level of cryptography security. But though many may think of digital currencies, like Bitcoin and Ether, first when they think of it, blockchain is the foundation for several tech platforms, and many types of products. One example is non-fungible tokens, or NFTs, a type of blockchain-based token called a utility token. 

Utility tokens are like another type of token, also blockchain-based. 

What are tokens (utility and security tokens)

First, let’s be clear, though both are called tokens, neither security tokens nor utility tokens are cryptocurrency. Instead, utility tokens and security tokens are two forms of tokens, representations of a digital or physical asset that exists on the blockchain ledger. 

Utility tokens

Some writers have compared tokens (like utility and security tokens) to digital poker chips—a digital representation that can be traded in later for the actual thing. Another example is the in-game token. With in-game tokens you give the company money, and in return you get tokens that can be used to buy gameplay implements later. In-game tokens and NFTs are two examples of utility tokens, giving you the right to a particular action, and platform-specific. 

Utility tokens however have limited use compared to the security token.

Security tokens

Security tokens, like traditional financial securities, are investments whose purchase gives a stake of ownership in a business or income producing asset. It’s a digital share of stock and proof of ownership that exists on a blockchain platform. Cryptopedia (run by crypto platform Gemini) notes that security tokens are programmable, and face higher levels of regulation than other blockchain products. They’re more credible than some other blockchain investments, and regulated as legal securities by the SEC because they’ve passed Howey test criteria. 

The benefits of security tokens

  • Safe – Because they’re legally deemed as investments, security tokens are regulated, offering some of the same protections as traditional securities 
  • Transparency – Security tokens on blockchain exist forever on its cloud-based public ledger, a continuous list of transactions proving ownership, even if the investment is sold or traded multiple times over
  • Decentralized – Buyers don’t have to go through traditional brokers or other intermediaries, cutting down on paperwork and leading to potentially lower fees
  • Automation – They can be programmed to perform actions based on triggers, like having dividends released when a certain event occurs 

The world of blockchain-based finance (also known as decentralized finance) can be confusing at first with so many terms sounding virtually the same but having different meanings. Here are a few other terms you should know, including two that sound like security tokens (but aren’t.)

Tokenized security assets (aka tokenized securities) are not “security tokens”

You’ll sometimes come across the terms “tokenized security assets” or “tokenized securities.” These two terms may simply sound like another way of saying security tokens, but they’re not. 

Tokenized securities are regular securities investments that have been digitized to be sold on blockchain. For example, a Blue-Chip company may issue tokenized versions of their regular securities products. Once tokenized, they can be sold on blockchain networks, as well as through traditional trading outlets to raise equity. However, they’re not programmable or verifiable on blockchain like security tokens. 

Can security tokens be fractionalized?

Just as traditional stocks offer fractional shares, you can also purchase fractional security tokens. Real estate is one example of a market that now offers this kind of trading where you can buy not only fractions of security tokens but fractions of income producing properties in the United States. 

STOs & ICOs

Just as you have traditional stock IPOs, you also have STOs and ICOs.

  • Security token offerings (STOs) are the security token version of an IPO, on the blockchain, and regulated by financial overseers 
  • Initial coin offerings (ICOs) are another way for companies to raise funds on blockchain, trading cryptocurrency for cash; however, they pay in cryptocurrency, not company shares. Also, ICOs are not regulated.

Finding security tokens to buy

The world of security tokens is constantly evolving so if you’re looking to buy and trade security tokens, do some research first. Major crypto exchanges like Coinbase and Binance sell several types of blockchain products (like NFTs, etc.) However, differing regulations on security tokens may mean these products aren’t available through these and other exchanges in every country. 

We at BRET Real Estate Tokenization are here to help with some advice, and a few security token offerings of our own representing Miami based real estate.

Interested in investing in real estate

Real estate is always a great investment, and the world of security tokens is making it easier than ever for investors to start trading. Ready to learn more? Get on our BRET Real Estate mailing list to learn when our next security token opportunity is available. 

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