Tag Archives: Security Tokens
Our previous post defined security tokens and explored several uses cases for “securitizing” various investments. We explained that security tokens are backed by real-world assets that are tangibly valuable. This makes the asset more liquid because it provides a building owner, art dealer, or classic car purveyor with access to capital while still retaining ownership of the tangible “thing.” While utility tokens are typically offered with an ICO and might grow in value, but can become worthless. But the differences between these two types of tokens is a little more complex.
Before digging deeper into a security vs. utility comparison, it’s helpful to first define a “token” to provide some needed context. In the simplest form, a token is an asset or some unit of value that is offered/issued by a company. This issuance is usually done through an initial coin offering (ICO), similar to the familiar initial public offering, or IPO. Instead of stock received in an IPO, an investor receives a token that corresponds to a set monetary value. Security tokens are offered as security token offerings (STOs), another category of investing where security tokens are exchanged for fractional asset ownership. So why are tokens not considered “coins?” Coins have a payment-related use case and their own blockchain, while tokens are secondary assets that do not run on their own blockchain.
Essentially, a security token is one that “securitizes” a real-world asset. So the coin is backed by an asset that has a tangible value, unlike an ICO that involves utility coins which might accelerate in value but can also turn into ether. Security tokens enable assets to become much more liquid as they allow fractional ownership of assets. And their blockchain-based structure means the ownership rights are transparent and easily verifiable. Here’s a simplified example of security tokens at work: Your friend is starting a cat food company, but needs investors. She offers a “Meow Meow” security token for $1, with a goal of raising $250,000. Investors buy blocks of the tokens and this ownership might come with certain rights or dividends. Your friend receives the money necessary to build a business, and the investors gain ownership stakes and the potential for profits as the business succeeds.
A key benefit of security tokens is they provide liquidity to the underlying asset. They’re cryptographic tokens that pay some sort of dividend, interest, or other payment to the token holders, so they are highly liquid compared to more traditional assets such as stocks or bonds. Many in the blockchain and cryptocurrency industries see security token offerings STOs as the future vehicle for investing instead of ICOs which peaked (and often crashed) in 2017.