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Glossary

Security Token

A security token is a type of digital asset that represents ownership in a real-world asset or enterprise and is subject to securities regulations. These tokens can represent shares in a company, ownership of physical assets like real estate, bonds, or other financial instruments. Unlike utility tokens, which provide access to services, security tokens are investment contracts with profit expectations and legal rights.

Security tokens aim to bring the benefits of blockchain — such as transparency, programmability, and 24/7 settlement — to traditional financial markets. Projects issuing security tokens must comply with local financial laws, such as SEC regulations in the U.S. or MiFID II in Europe.

How Security Tokens Work

  1. Asset Tokenization - A real-world asset (e.g. equity, real estate) is digitally represented on a blockchain.
  2. Regulatory Compliance - Issuers follow securities laws including KYC, AML, and investor restrictions.
  3. Smart Contract Issuance - Tokens are minted and distributed using smart contracts, often on permissioned or compliant blockchains.
  4. Investor Rights - Token holders may receive dividends, voting power, or profit shares, similar to traditional securities.
  5. Secondary Market Trading - Security tokens can be traded on regulated platforms like INX or tZERO, depending on jurisdiction.

Key Features

  • Regulated Asset Class - Subject to national or international securities laws.
  • Asset-Backed - Represents claims to real-world value or cash flow.
  • Investor Rights - May include dividends, profit sharing, or governance.
  • Smart Contract Logic - Rules for transfers, compliance, and distributions are enforced programmatically.
  • KYC/AML Integration - Only verified participants can hold or trade the token.

Benefits of Security Tokens

  • Fractional Ownership - Enables access to high-value assets through smaller investment amounts.
  • Transparency - On-chain records offer real-time auditability and investor tracking.
  • Programmable Compliance - Ensures regulatory adherence through automated logic.
  • Faster Settlement - Reduces delays and costs typical of traditional financial infrastructure.
  • Global Accessibility - Opens investment opportunities to broader, borderless markets (where legally allowed).

Risks and Challenges

  • Regulatory Complexity - Navigating varying securities laws across jurisdictions can be costly and time-consuming.
  • Limited Liquidity - Fewer compliant secondary markets exist compared to utility tokens.
  • Custody Requirements - Security tokens often require regulated custodians or third-party platforms.
  • Investor Restrictions - Some jurisdictions allow only accredited or institutional investors to participate.
  • Token Freezing or Reversal - Certain tokens can be forcibly frozen or reassigned based on legal actions.

Use Cases of Security Tokens

  1. Equity Tokenization - Startups and enterprises tokenize company shares to raise capital.
  2. Real Estate Investment - Property ownership is fractionalized into tradable tokens.
  3. Debt Instruments - Bonds and loan agreements are issued as blockchain-based securities.
  4. Revenue Sharing Tokens - Investors receive income based on project performance or protocol earnings.
  5. Fund Shares - Tokenized representations of shares in venture funds or ETFs.
  6. Regulated Marketplaces - Platforms like Securitize or Tokeny facilitate compliant issuance and trading.

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