Security Tokens in Cryptocurrency Explained

Tokenized Securities, Digital Securities, Computer Security Tokens, and More

In cryptocurrency, the term Security Token can either be referring to 1. a cryptocurrency token registered as a security, 2. a digital representation of a traditional security like a stock (a tokenized security), or 3. a cryptographic code used in computer security.

The new exciting cryptocurrency products you’ll hear about in the news are the first two, the longstanding technical term used in computer security and cryptocurrency when discussing the backend is the third one.

This page will focus on the first two types of security tokens, but you can check out the next section for an explainer on the difference between security tokens in computer security and security tokens as financial products.

TIP: The term Digital Securities may also be used to describe digital financial products that are securities.

The Difference Between Tokenized Securities and Computer Security Tokens

If someone uses the term “security token,” we have to generally figure out if they are talking about financial products or computer security (something you can generally glean from the context of the conversation).

  • Are they talking about securitized and tokenized digital financial products (maybe a cryptocurrency registered with the SEC, a way to trade Apple and Amazon stock using blockchain tech, or replacing traditional shares in a company with crypto tokens)? If so, then security token has one of the first two meanings noted above.
  • Are we talking about computer security and tokenization in computer security? If so then a security token has that last meaning.

The confusing thing here is:

  1. A lot of the same terms are used in computer security and cryptocurrency (because cryptocurrency borrows a lot of tech from computer security),
  2. The term security has a very different meaning in computer security than it does when discussing financial products regulated by the SEC.

Then, this is somewhat confused more by the many definitions of the term “token” (a term used in general, in economics,  in computer security, and in cryptocurrency in different ways).

All that covered, there is a 99% chance that the average person will run across the term “security token” in respect to cryptocurrency when discussing regulated tokenized financial products that are securities or deal with securities. So let’s put all the confusion aside and just talk about that.

Cryptocurrencies Registered as Securities and the Tokenization of Securities

As noted above, we have two types of cryptocurrency products that deal with securitization and tokenization.

1. Cryptocurrency tokens registered as securities, and 2. we have traditional securities that can use cryptocurrency tech.

Cryptocurrency tokens registered a securities is a simple concept to grasp. It is a crypto, that registers as a security with the SEC.

The second concept isn’t that hard to grasp either, we are talking about a traditional security, like Tesla stock, that uses cryptocurrency tech.

So here we may take an existing stock and create a digital cryptographic representation (a token) and then trade it using smart contracts and blockchain tech, or we may create a token that represents equity in a new company and use crypto tech to trade that. Or, one can do any variation of that.

STOs and DSOs

Initial sales of digital securities are sometimes being called Security Token Offerings (STOs) or Digital Security Offerings (DSOs).

This is like an IPO, but for a digital financial product that is registered as a security. So be it a crypto token registered as a security or a digital representation of equity in a company, an offering of this might be called an STO or DSO.

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...