Security tokens are similar to stock certificates that officially represent ownership. The key difference is that security tokens are recorded on the blockchain and represented by a token. For this reason, they can be referred to as equity tokens and are regarded as securities by financial regulatory bodies. This subjects a security token to the same regulations that govern traditional securities, such as stocks and bonds.
Security tokens benefit from blockchain technology, as it eliminates the friction, delays, and fees commonly associated with traditional capital markets. In comparison with the traditional market, a security token can further fractionalise an asset to make it accessible for smaller-market participants.
From the perspective of a trader, the transparency of a public ledger makes it almost impossible for market manipulation, deception, or misunderstanding regarding the ownership. Three types of security tokens are listed below.
Equity Tokens
Equity tokens are similar to traditional stocks — they both represent shares in a company, and owning them means owning a fraction of the company. The main difference is that, while a traditional stock is often logged in a centralised database, an equity token is recorded on the blockchain.
Debt Tokens
Debt tokens are essentially short-term loans from investors to a company. Commonly, they are debt instruments, such as corporate bonds or real-estate mortgages, that are converted into tokens. This type of security token produces a yield in the form of dividends based on the payments of the underlying debt instrument.
Asset-Backed Tokens
This category of security tokens represents the ownership of real-world assets (RWAs), such as real estate, art, or commodities. Asset-backed tokens leverage the benefits of blockchain technology for a more secure and transparent record of transactions, with reduced fraud and settlement times.
