There is a lot of hype behind security tokens today. But what is it all about? Are security tokens that important and if so, why are they so important. A security token in the simplest terms is a cryptographic token that pays share profits, dividends, invests in other tokens or assets for profit generation and pays interest. It takes care of the liquidity issues of assets. Security tokens have taken care of the liquidity problems that existed with paper backed assets like bonds or real estate. However, cryptographic representation of these in token form takes care of the liquidity issue.

With security tokens, your dividends are paid on a particular date after meeting certain conditions via a smart contract.

How does security tokens work?

Security tokens represent a share in the company that issued it instead of conferring tangible benefits to the owner. One thing to note here is a token is a representation of something in its specific ecosystem. A token can’t be limited to one particular role and can fulfill so many roles in a native ecosystem.

When a holder is in possession of a specific token, they get a specific amount of rights in the particular ecosystem. These tokens design an internal economic system within the restrictions of the project. A security token must have one of the following properties to retain its value:

  • Earnings to help in equal distribution of profits and other financial benefits among the investors
  • Currency: This means it can be used as a value store and can conduct transactions inside and outside the ecosystem
  • Function: The token enables the holder to enrich user experience in the confines of a specific environment
  • Toll: It can be a gateway allowing you to use particular functionalities of a system
  • Value exchange: The token can create an internal economic system in the confines of a project
  • Right: the token holder has a particular amount of rights in the ecosystem where the token exists

Security tokens are heavily regulated by the government. They offer the ease and speed of a blockchain without sacrificing legal protection. Security tokens provide increased protection against misselling and fraud in blockchain investing.

In the United States, a litmus test known as the Howey Test is done to determine whether or not cryptoasset is a security token. The Howey Test was created by the Supreme Court to judge whether certain transactions qualify as investment contracts or not.