What is security token?

by in Crypto 101, Cryptocurrency For Beginners

Security token

Advanced people in the crypto environment surely have heard and know what security token is. But for newbies, it is often very tricky to get acquainted with so many terms and new concepts. We are here to make everything clear for the ones, who are making their first steps into the crypto universe.

What is a token?

Every concept is connected with another one. So, for starting your acquaintance with the security token, you will have to know what token is, and how many types of it exist.

A token is an asset that endures on an existing blockchain. But what does this mean? Tokens have their blockchains, but they depend on another existing blockchain of a cryptocurrency. Token has a unit value, and it is tradable. The value can be in the form of anything: points, in-game items, coins, etc.

Usually, tokens are used to raise money in ICOs, or IPOs, or Token Crowdsale. ICO, IPO, and Token Crowdsale give a company an opportunity of gathering money for its further improvement and the user of getting a share or voting rights in that company. Tokens have their types, and now we are going to talk about them.

Types of tokens

There is no identified grouping of tokens nowadays, but two organizations SEC in the US and FINMA in Switzerland are making attempts to create one.

And the SEC and the FINMA classify tokens into two categories: security tokens and utility tokens.

One more division can be named Payment tokens or "real cryptocurrencies." That is a kind of asset that has its blockchain and is supposed to be a medium of payment.

The variation of classification by the two institutions is that FINMA is concentrated on the economic functions, and the SEC is comparing tokens with securities.

Every type of token has its fundamental features:

Utility token (SEC/FINMA)

This type is designed to give the user access to the project's services and goods.

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A security token (SEC)/ Asset token (FINMA)

This class represents an investment in the project.

Cryptocurrency (SEC)/ Payment token (FINMA)

Usually, this kind of tokens doesn't have any connections to further advancement of the project. The idea of cryptocurrencies is to be items of primary value that intend to enable various economic activities.

Differences between the two categories

The principal contrast separating utility and security tokens is in their purpose and functionality. As already stated above, security tokens intend to give you a share in a project. And utility type proffers access to the project's goods.

If you get a security type of token, this is seen as an investment, in the case of utility one, this is not so.

Governmental institutions can manage security tokens, and utility ones aren't a subject of federal laws.

A tip for newbies (The Howey Test): If you are wondering about what type of token you're purchasing, ask these two questions, and if the answer of any of them is "yes," then it is a security token.

1) If I become a holder of this token, will I be able to provide funding for the company's capital and receive a share of the earnings?

2) Does the fundraising effort of the ICO need investment in the project where earnings are generated totally from the work of individuals other than the authors or founders of the project?

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Everything about Security Tokens

As we previously mentioned, the Security token is a category that is esteemed as an investment. If an asset passes the test, we have talked about above, it is identified as a security token and considered to be a security, so it's regulated by federal institutions. There can be immense punishments if the security token doesn't match all the laws and regulations. In the cases when everything is performed accurately, this kind of tokens have prominent use-cases.

In the USA, security tokens have to match these regulations:

Regulation D: It requires recognition that the investors are authorized, and the information which has been presenting during the solicitation is “free from false or misleading statements."

Regulation S: This happens when a security offering is performed in a country apart from the US and is therefore not subjected to the certification requirement under section 5 of the 1993 Act. The authors are still obligated to follow the security laws of the country where they are thought to be executed.

Regulation A+: This release will let the author offer SEC-approved security to non-accredited investors through a usual solicitation for up to $50 million in investment. For the obligation to register the security, the issuance of Regulation A+ can take a lot more time as opposed to other alternatives. For the same reason, Regulation A+ issuance is going to be more expensive than any other.

Here are several points on how these tokens can develop the market, and why they are so great to have.

  1. Security tokens, unlike traditional stocks, allow markets to operate 24/7, which reduces the massive inabilities of daily market closures.

  2. In a future where just about anything can be tokenized, this unlocks the door to the capacity of computer systems or software to interact and make use of data.

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  3. Acquiescence with laws can be automated when it is directly baked into a token.

This is just a tiny part of the positive modifications that security tokens can make to the market. Despite that these tokens persist underutilized nowadays, they're promising. The one undeniable fact is that there'll be plenty of security tokens appearing in the sphere in the upcoming years.