What is Security Token
It’s not difficult to understand security token. If you split it to two words, ‘security’ means a certificate with intrinsic monetary value that can be traded, just like stock and bond. ‘Token’ means a voucher that used in exchange for good or services. When the two words combine, it means a digital token with the value of tradable asset, as a digital form of security.
Howey Test can help to identify whether the token is classified as security base on four guidelines. These include If there is money involved in investment, whether there is expectation of profits, also in a common enterprise, if there is effort involved from a promoter or a third party, then the token itself can be deemed as investment contract, a form of security.
In a generalized view, most of the tokens in the market are utility token. People bought it from the crowdfunding of startup for later access of products and services. The value of token derives from the faith of investor towards the company.
Just like traditional security, security token’s value derives from the asset behind, investor can get dividend from the token, so it can be seen as a digitalized security, and it is compatible to law as well.
Security token offering is nothing new, but a digital form of tradable security stored on blockchain, leveraging the integration of technology and security.