Although security tokens have been around for a while, they have started to gain popularity because they offer several advantages over traditional investment vehicles. In particular, security tokens can be used in RegA+ offerings, allowing companies to raise money from accredited and unaccredited investors. As a result, security tokens have quickly become one of the most popular ways to invest in startups and other high-growth businesses.
What are Security Tokens?
Security tokens, as the name implies, are securities. And much like traditional securities, they represent an ownership stake in a company or some other asset and are subject to the same SEC oversight as stocks, bonds, mutual funds, and other forms of investment vehicles. Because of this, they share a familiar structure and have regulatory protection that makes them attractive for companies and investors alike. There is a greater assurance for the issuer that their investment will be protected from the volatility often associated with unregulated cryptocurrencies. For the investor, there is the added security of knowing that an asset backs its investment with value outside of the blockchain.
”Security tokens are the missing link between the traditional financial world and the blockchain,” says Andrew Bull, founding partner of Bull Blockchain Law and KorePartner. “They provide the benefits of both worlds: the security of regulated securities and the flexibility and opportunity of digital assets.”
However, are security tokens the same as digital securities? The short answer is: yes, security tokens are the same as digital securities. Both represent an ownership stake in an entity or property, subject to SEC regulations. Thus, the names can be used interchangeably. The key difference between security tokens and traditional securities is that the former are digital representations that move and exist on a blockchain.
It is also important to consider that while security tokens are cryptocurrencies, they are different from coins. Coins represent value on their own, like Bitcoin or Ethereum, whereas tokens have a function other than storage or exchange alone. And unlike utility tokens, security tokens represent a stake in an asset that has value outside of the blockchain.
“Because security tokens denominate a stake in an asset that already has value outside of the blockchain, their value is not necessarily domain or ecosystem specific, as is the case with utility tokens,” says Bull. “Instead, the assets apportioned through the security tokens exist in the traditional market, in public and private equities. This makes the security token a naturally more attractive investment to both issuers and investors, as it provides a connection between traditional and digital investment assets.”
Benefits of Security Tokens for Issuers and Investors
Security tokens offer many benefits to companies and investors. Perhaps most importantly, they provide a bridge between traditional and digital investment assets, making it easier for companies to raise money and investors to gain exposure to the blockchain ecosystem. Because security tokens are subject to SEC regulations, issuing companies may benefit from the reassurance that their investment might be protected to a certain extent. The same benefit goes to the investor.
“Both parties can expect their ownership stake to be preserved on the blockchain ledger, as well,” said Bull. Investors can benefit from security tokens because they connect traditional and digital investment assets. Security tokens also have the potential to help investors by providing regulatory protection. This is important because it can help to mitigate the risk associated with investing in more experimental, unregulated cryptocurrencies.
On the other hand, digital assets not subject to SEC regulation, like utility tokens, have proven vulnerable to volatility and, therefore, challenging to maintain conditions stable enough to run a company. In this case, the investor in the utility token is exposed to a great deal more risk than the investor in the security token.
In summary, security tokens offer several benefits to both companies and investors. They provide a bridge between traditional and digital investment assets, making it easier for companies to raise money and investors to gain exposure to the blockchain ecosystem. These characteristics make security tokens less vulnerable to volatility and a more stable form of investment. They are also subject to SEC regulations, which provide some protection for both companies and investors.