If you are a cryptocurrency follower and are interested in blockchain technology, you probably have heard about security tokens. Go to some web browser and search for security tokens – you will see that there are many articles, videos, essays explaining how security tokens are the next big thing, and how will they revolutionize the blockchain. For that reason, it is worth explaining everything important about security tokens.
First of all, we must explain what tokens are. The term “token” can refer to different things, it is a representation of an item in a given territory. A token is not limited to a certain role, it can value anything. Cryptocurrency coins such as Bitcoin or Ethereum are independent coins on a platform and can be used as a currency out of their native environment. On the other side, tokens such as OmiseGO or Golem are existing in the Ethereum platform. These tokens, as an asset, can be used by a company to give to their investors during the Initial Coin Offering (ICO) process. ICOs are actually crowdsales through which companies, especially startups, are raising funds for their projects.
There are two types of tokens: utility tokens and security tokens. A utility token is usually an Ethereum-based token, backed up by a project, used for providing rights for a user to access some network. Moreover, utility tokens can give their owners the possibility to vote for a project they want on a particular network. They are used for providing users with some product or service.
On the other side, security tokens are much more government-regulated than utility tokens. They are treated as securities. Securities are financial assets such as stocks, warrants, bonds, debentures, etc. that are used by governments and companies for raising money from investors and capital markets. When these things are done through a token, that token is called a security token.
Basically, security tokens are cryptographic tokens that are able to invest, pay interest, share profits, pay dividends, generate profits, etc. Because these tokens are considered as a security, they are subject to government regulations and laws. If an ICO project doesn’t comply with the regulations, they could face a penalty.
We already have assets represented by the security tokens in the world, so security tokens are actually a connection between the blockchain world and the financial world. Moreover, security tokens cut out the third parties in the financial transactions, which leads to less fees. It is expected that in the future, smart contracts will cut the complexity of the paper works. By eliminating third parties, the whole process of executing transactions will be faster and simpler. Because of this, security tokens are likely to become the biggest revolution today.
Security tokens are a big thing nowadays because they are considered as very safe tokens due to the government regulations. They are something that will become huge in the future and will be recognized by everyone. It is expected that many companies will turn to security tokens instead of utility tokens. Just like the Bitcoin has revolutionized the world of currencies, the security token will revolutionize the world of assets.
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