Security Token

Security tokens aim to combine the features of traditional financial securities with the advantages of blockchain technology, such as faster settlement, easier transfer and the ability to divide assets into smaller units.

Because they represent investments, security tokens must generally comply with securities regulations, including registration or exemption requirements, disclosure rules and restrictions on who can buy them. This distinguishes them from utility tokens, which give access to a product or service, although the line between the two is often debated.

For example, a company might issue bonds as security tokens on a blockchain, with interest payments made automatically to token holders and ownership recorded on the ledger.

In the United States, whether a token is a security is generally assessed using the Howey test, which asks whether people invest money in a common enterprise expecting profits from others' efforts. Several banks and governments have issued tokenized bonds, but trading markets for security tokens remain small compared with traditional markets.