Security token
A security token is a digital token that legally represents a financial right. That right may involve interest, dividends, ownership, or voting rights.
What is a security token?
The rights associated with a security token are set out in terms or a contract. So the token is more than just a digital item: it can also give you a legal claim.
The token is usually on a blockchain, a digital ledger where information is recorded. The blockchain helps issue and manage the tokens, but the legal documents determine what rights you actually have.
An example of a security token
Imagine a company issues tokens. The terms say that holders are entitled to a share of the profits. Someone who owns one of these tokens may receive a profit distribution under those terms.
This is a security token because it is linked to a financial right. That makes it more like a stock or bond than a token that you use only to access a service.
Why are security tokens important in crypto?
Security tokens are often subject to securities and investment regulations. As a result, a provider may be required to give clear information about the token and its risks. An identity check may also be required before someone can buy or receive the tokens.
These tokens may be harder to transfer or sell freely than other tokens. For example, a contract may specify which wallets can receive them, or temporarily prohibit their sale.
Security tokens may come up in crypto news in connection with a Security Token Offering (STO), new regulations, or trading platforms. It’s important to know that a right to interest, dividends, or profits doesn’t guarantee that a distribution will actually be made. The value depends, among other things, on those rights, expected returns, and supply and demand.
