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Simple Guide to Security Tokens

Blockchain technology opens up opportunities for creating a wide range of new business models. One of the main reasons it has become so successful is the use of tokens. In this article, we will give a basic definition of the Security Tokens, and highlight the difference between these financial instruments that hold value.

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What are Security Tokens?

Simply put, Security Tokens represent a “share” of an underlying asset, such as a company, real estate, or gold, based on the blockchain. A useful analogy is buying stock, which makes one the owner of a small part of the company. It gives him the right to implement investment projects. Security Tokens are similar to these shares but capable of much more. The rights to own shares are recorded in a smart contract and with the purchase of such token, the person becomes the holder of the shares.

Exchange trading of security tokens is regulated by financial regulators such as the US SEC. STs are legal, not technical. They represent any blockchain asset that complies with the SEC standards for a securitized asset. 

Where one can buy Security Tokens?

For the initial distribution of such tokens, there is an analog of ICO - Security Token Offering (STO). In addition to STO, some tokens can be bought on crypto exchanges, but usually, exchanges try not to get involved with this type of tokens. As there is a difficulty in working with them due to the legislation regulating the circulation of securities in various countries. There are specialized platforms for trading these tokens. Several companies have developed competing formats for proprietary security tokens, such as ST-20 from Polymath, R-Token from Harbor, and Bitcoin Market Journal's own Equity Token project. Those who wish to select one should do their own research to find the most relevant option.

What is the value of security tokens?

Security tokens are linked to bonds, and their purchase is considered as a financial investment. Companies issuing security tokens are required to comply with all requirements of regulators and provide them with reports. Therefore, the purchase of such tokens is less risky than the purchase of ordinary tokens at the ICO, that are not regulated by anyone. Fraudulent organizations will not be able to issue security tokens without violating the law.

Compared to conventional bonds trading, the tokenized asset market offers the following advantages:
  • Avoidance of the services of intermediaries when buying; banks and other financial organizations are not involved in trade;
  • Seven days a week, 24-hours a day an opportunity to purchase an asset;
  • An opportunity of fractional ownership of any asset;
  • One-click token buys; a simple process of the subsequent transfer of an asset to another person.

Prospects for the Security Token Market Development 

Multidirectional trends are now being observed. To bypass bureaucratic procedures and avoid unnecessary costs, companies do everything possible to ensure that their tokens are not recognized as securities. On the other hand, regulation of the industry is still necessary for institutional investors to enter it. The rules for issuing Security Tokens are more in line with the requirements of large investors, who are still afraid of anonymity and the lack of a legal framework regulating cryptotraffic and investments in cryptocurrencies. Therefore, the development of the security token market will have a positive effect on the crypto market as one of the directions of its formation.

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