What are security tokens? Here’s everything you need to know

Blockchain is a solid trend in fintech innovation that doesn’t only apply to cutting-edge implementations but also disrupts traditional banking companies. One of the recent blockchain trends is security tokens. 

Security tokens have generated a lively debate in the financial services and crypto communities. While some enthusiasts speculate about the potential profits security, others believe it’s just a fad that actually carries significant risk. Interestingly, one of the reasons behind this divergence of opinions is that there exists some confusion as to what security tokens actually are. 

The legal and compliance aspects make it more difficult to understand the differences between various types of tokens like security tokens, utility tokens, and other digital assets.

You may remember the initial hype that surrounded Initial Coin Offerings (ICOs) just a few years back. But with fraudulent activity coming to light, many people became suspicious of blockchain and likely to discard novelties without even understanding what they are. They could be missing out on a significant opportunity. As ICOs gave way to Security Token Offerings (STOs), we saw new fundraising mechanisms designed to issue security tokens in a safer and more reliable way.

Read this article to learn everything you need to know about security tokens: what they are when to use them, and how they’re currently regulated in various countries.

What are security tokens? 

When ICOs started to become popular a few years ago, the Securities and Exchange Commission (SEC) began to pay attention to them, noting an increasing number of fraudulent schemes. 

Let’s stop here for a moment to explore the topic of securities. In general, we can define securities as tradable financial assets such as equities, options, bonds, and warrant. Security tokens meet these criteria and, as a result, belong to the same category of assets. To determine this, the United States Supreme Court created a special test called the Howey test to be used by the SEC. 

According to the test, we can class a token as a security token if it meets the following criteria:

1. The token works like a financial investment and has voting rights,
2. The investment will go to a company/group of companies,
3. The investor expects the acquisition of the token to bring them a profit,
4. The profit will be generated by the work of third parties.

If a token meets all of the four criteria, then the company offerin