What is a Security token?

Security token

When considering the topic of tokenization, which represents the most innovative application of blockchain technology, security tokens have emerged as a significant player. The term “security token” is comprised of two words, namely “security” and “token”. Therefore, it is important to delve deeper into their meanings.

Why is it a token?

Digital Representation

A security token is a digital representation of ownership or set of rights in the form of a cryptographic token stored on a blockchain. It encapsulates the rights and entitlements associated with owning a specific financial asset such as stocks, bonds, or real estate.


It operates on a blockchain, which is a decentralized, distributed ledger. This ensures that ownership records are secure, transparent, and immutable.

By utilizing blockchain’s distributed ledger technology, security tokens offer improved liquidity and efficiency compared to their traditional counterparts

Smart Contract Functionality

Smart contracts are self-executing contracts that are stored on a blockchain they are employed to define the rules and conditions governing the token. These contracts execute automatically when predefined conditions are met, enabling functionalities like ownership transfer, dividend distribution, and more.

For example, a smart contract could be used to create a tokenized version of a real-world asset, such as a piece of real estate or a work of art. The smart contract could specify that only accredited investors can own the tokens, and that tokens can only be transferred between accredited investors. The smart contract could also be programmed to automatically distribute dividends to token holders when the asset generates income


Tokens are designed to be compatible with various blockchain platforms. This allows for seamless transfer and interaction with other tokens and assets on the same or different blockchains.

Why is it a Security

Ownership in an External Asset

Unlike utility tokens, which grant access to a specific service or platform, security tokens derive their value from real-world assets such as equities, real estate, bonds, or other forms of ownership. If you want to learn more about tokenizing real estate, check out our recent article ‘Unlocking the Power of Real Estate Investment with Tokenization‘.

Compliance with Securities Regulations

Security tokens are specifically designed to comply with existing securities regulations. This means they are subject to legal frameworks that govern investments, providing a level of protection and regulatory oversight to investors.

Securities regulations are in place to safeguard investors’ interests and maintain the integrity of financial markets. Compliance with these regulations is a crucial aspect of security tokens, providing a framework that ensures fair and transparent trading.

Increased Investor Protection

Blockchain security tokens enhance investor protection through transparent and secure ownership records. The blockchain’s immutability guarantees tamper-proof ownership proof. Additionally, KYC and AML procedures in token issuance and trading prevent fraud and ensure regulatory compliance.

Follows Token Standards

The adherence to security token standards offers several significant benefits to both issuers and investors in the blockchain and security token space such as Interoperability, Regulatory Compliance, investor protection, Global Accessibility and Legal Certainty.

One standard is ERC 1400 which provides document management, error signalling, gate keeper (operator) access control, off-chain data injection, issuance / redemption semantics and expose partially fungible subsets of a token holders balance.


Security tokens represent a significant evolution in the financial industry, offering a bridge between traditional assets and the world of blockchain technology. With the potential to enhance liquidity, accessibility, and efficiency, security tokens have the capacity to reshape how we approach investing in assets.

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