A security token could be defined as a digital equivalent of the ownership rights that exist in the real world, which is the case with other financial securities. Like for example, stocks, bonds, or a company’s shares. The main difference between a security token and other financial instruments is that it is backed by a blockchain platform. Hence, using the decentralized technology, ownership can be recorded, transferred, and confirmed without relying on the traditional way or central systems.
Security tokens are likely to represent the company’s stock, confer voting rights, and possibly even share in the profits or be owners of a specific part of the real estate or commodities that are viewed as valuable assets. Since these tokens function like investment vehicles, they are therefore obligated to be compliant with the same regulations that govern traditional securities. Firms that are issuing security tokens must navigate a complex landscape of legal and regulatory hurdles, including the provision of investor protections and compliance with disclosure obligations.
Security tokens are a product of the blockchain and, therefore, they benefit from speedy transactions, fractional ownership, and the use of smart contracts for transferring ownership. Thus, it is less complex and expensive for institutions and companies to attract investment while at the same time the investors have access to a wider range of markets that were previously considered off-limits.
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On the contrary, security tokens are not the same as utility tokens, but they are a form of digital currency that has a direct connection with the real value of money. To sum up, they are the digital versions of regulated investments that at the same time benefit from the blockchain technology and the protection of traditional financial law.