What Are Security Tokens? How are they different from Cryptocurrencies?

by Chinma Udeji | Mar 31, 2023 | Investments | 0 comments

In this post, I explained security tokens (ST) and how they differ from cryptocurrencies.

You must have noticed the recent crypto crackdown from the U.S. government.

One major contention is the alleged claim that certain cryptocurrencies should be registered as securities.

But are they securities? Keep reading to find out.

What Are Security Tokens?

Security tokens are tokens that represent rights of ownership, transfer of value, or promise of returns.

Sometimes, traditional securities like stocks, bonds, ETFs, options, and futures are tokenized to become security tokens.

Security tokens do not run on their blockchains but on an existing blockchain.

Interestingly, the Ethereum blockchain is most commonly used for the deployment of security tokens.

The uniqueness of security tokens is that they guarantee holders a reward.

In other words, holders do not put the token to work to make a profit rather they benefit from the performance of the token.

Additionally, they can earn profits through dividends in the form of more tokens. And they may enjoy other benefits such as voting power.

Popular security tokens are BCap, TZEROP, SpiceVC, and 22xFund.

In the next section, we’ll see the differences between security tokens and cryptocurrencies.

How Are Security Tokens Different From Cryptocurrencies?

The main difference between security tokens and cryptocurrencies lies in their purpose, intended use, and actual use.

While cryptocurrencies are designed to be used as a payment method, security tokens are created to be investment assets like stocks and bonds.

However, when some investors notice that they could reap significant returns from cryptocurrencies, they tend to treat them as investment instruments but they are not.

For example, ETH was developed to be used to pay transaction fees within the Ethereum network, which makes it a cryptocurrency.

But because it is traded on exchanges and held for its increasing value, some investors treat it as a security token.

And the transition to a Proof of Stake has drawn the attention of regulators to view ETH as a security.

Nevertheless, cryptocurrencies like BTC and ETH cannot be tagged as security tokens because there is no expectation of profits from the developers.

To buttress this, let’s look at the criteria that make an asset a security;

It involves an investment of money.
The investment will yield profit.
The money invested is in a common enterprise.
It’s the promoter’s efforts that lead to Profit.

This is the Howey Test and it tries to determine whether investors in a common enterprise expect to profit as a result of the promoter’s (or a third party’s) efforts.

Again, security tokens are heavily regulated even though they’re issued on a blockchain because they are still securities.

On the other hand, cryptocurrencies are not regulated.

Furthermore, security tokens serve as investment contracts and guarantee ownership rights over off-chain assets.

But the value of cryptocurrencies is often driven by speculation. Therefore, investors are not entitled to a portion of the profits when a crypto project is successful.

Are there benefits to buying Security tokens?

Some benefits of ST are:

They offer a more efficient way to trade securities with the aid of blockchain technology.
Laws and regulations provide consumer protection.
They have high liquidity.
Holders of security tokens enjoy partial ownership of a company’s investment.
Stolen money can be returned due to increased traceability.

Interesting, right? Jump to the next section to see where you can buy these tokens.

Where Can I Buy ST?

Sadly, crypto exchanges are not keen on listing security tokens but you can buy them from top issuers like

Securitize,
INX, and
tZERO

Before using any of the platforms above, remember to do due diligence.

Conclusion

Security tokens and cryptocurrencies are both tokens, created and stored on a blockchain.

But they serve different purposes. While security tokens guarantee profits based on the efforts of a third party, cryptocurrencies are used for payment and other utilities.

This is where I’ll draw the drapes in this article and I hope it was worth your time.

Please drop any questions or thoughts you may have on the topic in the comments section below.

Also, share this post with your friends. Thank you!