If you have spent a dedicated amount of time in a particular financial realm, then you already know a thing or two about securities. Security is nothing but a financial instrument that has some potential value, and it can be traded just as an asset, commodity, or stock can be. You can also consider bonds, stocks, and cryptocurrency securities if you adhere to this particular definition. Security refers to a concept that can either be material or digital element that has been developed to ensure the repayment of the original investment that a user or person has invested into a particular commodity.

This is what a security is, you buy a stock or a cryptocurrency, and you invest a dedicated amount of money on this thing. Now you hold this stock or crypto, but what if in the future you can’t sell it and, therefore, it has lost all its value? It is a rather amusing concept. If this was true, then no one would be trading anything anywhere, and everyone would be minding their money and securing it in tight vessels and deep pockets that no one can ever reach.

Thanks to the concept of securities, this transition from an invested element into paper cash gets completed without any problem. You can hold as many bonds, stocks, or cryptocurrencies and then be able to turn them in to get your money back without any problem. The legal context of what a security is or can be is somewhat narrow, and it depends on the specific jurisdiction it is being talked in.

If the current criteria for a country don’t permit a dedicated element to be called security, then it won’t be called or referred to as security in that particular country. But at the same time, that thing could be secured in some other country or territory. Following, we will be talking about how the concept of blockchain technology can streamline the buying and selling of securities and bring a notion of context and smooth transition to this whole endeavor.

What is a Security Token?

A security token refers to a particular piece of a digital entity that can be issued and traded in a dedicated financial medium. This specific token also represents a particular stake in some dedicated asset or an external financial element. Any business or government out there can issue these entities only the origin of these entities remain propagated and differentiated, but when push comes to shove, each and every one of these behaves the same and serves an identical purpose when it comes to either stock, bonds, or cryptocurrency.

Why We Use Security Tokens?

The very first reason that should push you over the edge to accept security tokens is because of the fact that the whole thing is going to be commenced on a decentralized blockchain environment. This means that no one state, government authority, or private entity would have any kind of say in what specific policies are being subjected to the blockchain and in what context changes take place.

There are exactly no influencers within a blockchain environment; everyone has the same level of participation in whatever deal that is taking place at the moment. There are companies out there that are now distributing their shares to the shareholders in the form of a tokenized element. These kinds of companies and industries are making functional use of these security tokens.

Not only would these tokens be more secure than the shares for a dedicated company but they would also carry the same number of benefits that a particular share does. You would also get dividends, voting rights, and all kinds of protocols that you would from a share of owning some kind of stake in a dedicated company or industry. There are multiple benefits to this specific transition. As explained earlier, you would be conducting the whole thing in a blockchain environment, which in itself ensures complete inevitability and transparency, whereas giving no special treatment to any because each and every user conducting business on the blockchain environment is practically the same.

Other than that, you would also be able to entertain yourself with completely zero downtime and an effective approach to divisibility which means that you can divide these tokens into extremely delicate fragments and then change or distribute them into whatever users you find fit. Following are some of the benefits that you will be able to carve out of security tokens;

Complete Transparency

The first and foremost benefit that a security token is going to provide to you is the complete transparency of the participants. Along with their identities, some other personal or financial data is going to be redacted, but other than that, every element of the transition can be studied by the participants of a specific deal. You can see how many shares a particular user has, in what specific order these tokens are being generated, how the dividends are being paid by the company, and you can also come around the tracking of changes that takes place in a smart contract and how these are applicable to you and in what narrative.

Rapid Settlement Without any Hassle

Another great advantage of opting for security tokens is that you get to have rapid settlement no matter the kind of deal that you go in. With the conventional deals of the financial world, you would have seen people backing out on their word even on the written contract, and that is something that causes a marvel of a dispute between the parties involved. If anyone has a bad intent of leaving the trade at any potential period of time, then it could be problematic for other parties that are involved within the same trade because the person who is quitting or tampering with the terms of the deal is causing a great deal of distress for others.

But in terms of the security tokens, the clauses of the agreement or immutable, which means that once the contract is written and each and every participant has given their consent to honor the contract, nothing can be changed. The delivery of the goods in exchange for the payment would also be automated, which means that the party who is supposed to deliver some goods or services in exchange for the money should first deliver the services; other parties must check that everything is up to order and only then the funds would be released by the blockchain technology.

This is just how secure and hassle-free the whole experience is when it comes to blockchain technology. There won’t be any kind of dispute, and every settlement would be rapid and just; this is one of the many benefits that you would be able to harvest from blockchain technology.

Reliable Uptime

No website or hosting provider out there ensures 100% uptime; most of the time, when you come around their advertising page, you would see 99.99% uptime and never 100% because there is always a margin of error when it comes to providing extended uptime.

This not only affects the businesses, but many deals have plummeted into the soil just because a fully fetched uptime couldn’t be provided, and there were shortages and lapses in terms of people meeting the deadlines and other such commitments. Most of the financial markets out there are only open for a dedicated period of time; usually, they are off during the weekdays, and that is a bit problematic because business must never be stopped or take a leave but always be up and running.

This is where the prospect of security tokens comes into place because the crypto market and other digital asset markets never sleep, and they are active and working around the clock, providing you with the consistent uptime that you require for the success of your business.

Divisibility

Dividing a non-digital item or asset requires not only patience but also willingness from other participants to do so. Luckily this is not the case when it comes to security tokens. You can divide each token into multiple sub tokens and designated parts and then divide it among as many investors as you want. Real estate, art, crypto, nonfungible tokens, and even some of the digital manifestations of the financial attributes could be tokenized and then divided among people in a rather easier and more convenient impression.

You can divide a token into further tokens according to the size of the investors that you currently have. This is going to increase not only the accessibility of people towards this particular investment but is also going to make it more universal and wholesome. People would be able to trade it further, liquidate when the time or need requires, and all of that for no extra hassle. You must, however, keep in mind that there are some security tokens that have a particular limit on divisibility, which means that they can’t be divided when a certain limit has been reached.

In some potential cases, if the dividend rights and voting criteria have been rendered limited for specific individuals, then the divisibility factor of that particular token is also going to be extremely limited as well.

Difference Between Utility Tokens and Security Tokens

There are multiple similarities when it comes to utility tokens and security tokens, but as it happens, there are many differences as well. The offerings that both propose to the investors and traders are practically the same. These can be orchestrated with the help of smart contracts; these can be sent from multiple blockchain services and can be created either on security exchanges or through peer-to-peer transactions.

The only difference they have with each other is in terms of the economics and the regulations that control them. Both the initial coin offering and initial exchange offering are subtle manners for their issuance; this is to ensure that even a startup could have or roundup enough funds to develop their systems and infrastructure while the same approach is applied towards already established projects.

There is practically no difference when it comes to how these projects are controlled. However, there could be a factual difference regarding how people behind these projects try to get some traffic and funds rolling for their dedicated journey. When a user contributes some of their money towards these projects, they get digital tokens in exchange which allows them to become active participants within the project either immediately or sometime in the future.

If the project is completed and is presently active, then they can become a member of the project right now, or if for some reason the project is undergoing some development, then probably in the future. The voting rights, for the time being, may either be transferred to the holder of the token and that is the person who received the security token. If they don’t want the voting rights, then they can use the said token for the sake of buying products or availing of different services across the blockchain environment.

The utility tokens might not be as valuable as they are advertised to be. In terms of utility tokens, the prospect of a trader or investor earning a profit if the project becomes a success is particularly limited. The person is not going to be entitled to any part of the profit whatsoever, as is the case in terms of traditional securities. However, there could be some loyalty points that would be awarded to the person who has thrown or invested some funds within the project.

That is the very reason why the value of a utility token is driven primarily by speculation. Investors will be putting their money into it to retrieve it and sit by it in hopes that the price of that specific token will be through the roof in the upcoming years, but there are disappointments sometimes. Most of the time, in rare scenarios, nothing changes, and they are left with a useless token and all that money invested into the ecosystem of the project. That is why many times when these kinds of projects fail, there is potentially no way to protect the holders, and they are left there at the altar with all their money invested and nothing even remotely appreciable in their hands to recoup all their investment or even a fraction of it.

These security tokens, on the other hand, are also issued on the same principle as a utility token is, but if the project gets successful in the upcoming years, each and every investor or participant of the project is entitled to some kind of profit. A security token offering is issued whenever a new security token project is being minted and made available to the public because it serves as a distribution channel for the eventual minting of a security token and its availability and accessibility to other people.

But if you really give it a thought, the investment criteria for both are completely different, not in the potential sense of how much money you can invest into both but from a value standpoint. Utility tokens might or might not be worth something or anything in the future, but the security tokens, on the other hand, could be worth a fortune. That is more of a reason for people to invest not in a utility token but in a security token.

Security tokens are going to act as securities, whereas utility tokens aren’t. That should be the most viable and sensible aspect that an investor should see when it comes to differentiating between both and choosing a potential winner.

Being an investor, whenever you are putting your foot down into the blockchain world, and you are buying a security token, you are actually buying a security that ensures that in the future, by chipping in these tokens, you would be able to retrieve whatever investment you initially made into the market. These are going to work the same as buying equity, derivatives, or bonds work. These are investment contracts and therefore backed up by the utmost level of security and guarantee that your investment wouldn’t be subjected to ruin.

Conclusion

These security tokens work as the logical and eventual progression of the financial industry from every nook and corner. You can’t let this concept slide away from your eyes because eventually all kinds of trading and finance-related obligations must be committed to blockchain technology if investors, traders, and distributors have to make the future of those specific items secure.

Cryptocurrency might not be perfect right now, but this clearly works as a vehicle that can be used to push the use case of digital finance to other levels. Some work is still required when it comes to regulations that control these assets, but still, there is hope that in the near future, the work will be done, and there will be more advanced and unique system to kick start the working of a new financial order. Security tokens might be relatively recent, but their demand is going to increase steadily into the future, and this is an opportunity that you don’t want to be missing out on.