This post was originally published on Cryptorials.io and is republished here with permission.

One of the most significant recent trends in cryptocurrency has been the emergence and growth in use of security tokens. To answer the question ‘what are security tokens’ as simply as possible: they are crypto tokens which are legally defined as a ‘security’. Technologically they are no different from other tokens, the difference is only in their legal classification. At this point you could be forgiven for wondering what the hell a security is, so here we go…

A security is an ‘investment contract’. Common securities include things like company stocks and bonds. The main characteristics are: it is something which is sold as an investment, and its buyers make that purchase in the expectation of future profits. Other features of a security include the invested money being put into a common enterprise, and those profits expected by investors being generated by the work of a third party (such as the company whose stock you are buying).

When a crypto token is sold as an investment and meets the definition of a security they are known as security tokens. Unlike other cryptocurrencies their sale must be registered with the relevant authorities and stricter regulations must be followed. When these tokens are sold at the launch of a new project to fund development, these sales are often referred to as ‘security token offerings’ or ‘STOs’.

STO vs ICO

During cryptocurrency’s bull run in 2017 everyone seemed to be going crazy for ICOs. An ICO, or ‘initial coin offering’ is when a crypto currency or token distributes its starting supply of coins to financial backers, as a way to raise funds. Huge sums of money poured into these fund raising sales.

Unfortunately, a great deal of this wealth has since been wiped out. Most of the tokens sold during the ICO craze are now worth only a tiny fraction of the price they were sold at. In most cases this was simply because the projects have struggled to succeed and gain users, but there are also many cases in which the token sale seems to have been the main business venture, with little or no commitment to creating an actual product.

With so many people losing money, and more than a few projects who raised funds through an ICO being accused of misleading buyers or turning out to be an outright scam, pressure mounted from many investors for a safer and more highly regulated alternative. Security token offerings are presented as the answer to those concerns. The laws regulating the sale of securities, while placing restrictions on who can purchase them, do provide some consumer protections and reduce the risk of scams.

It should be noted, however, than not all tokens should or will be classified as securities. Many simply aren’t. Some are mined and not sold. Some are clearly utility tokens and not sold as an investment. In many cases, buyers who understand the risks they are taking may even prefer the freedoms associated with the less regulated ICO markets. But for buyers looking to invest in tokens through a format with the familiar protections they are accustomed to from stocks and shares, security tokens may prove to be an attractive alternative.

Other forms of security tokens

Security tokens may be best known for providing a more heavily regulated alternative to ICOs for new projects seeking funding, but they can also be used in other ways.

The fact is that anything can be tokenized and can benefit from the use of blockchain’s peer-to-peer technology. Company stocks, bonds, property titles, commodities and many other things can all be put on the blockchain and traded as tokens. In most cases, these tokenized assets would be considered securities.

In these early days, this type of security token is usually used to represent an asset created in a more conventional way. But it is possible that one day things like company stocks and property deeds may be issued on the blockchain from day one!

How to invest in security tokens

Buying and trading security tokens is not really any different to using other forms of cryptocurrency. All you really need to get started is an account with a crypto exchange which supports the token you want to buy.

In most cases you would ideally also want to get yourself a wallet, to transfer your tokens off the exchange where they may be more secure. The best wallet to use will depend which blockchain your token is issued on, so a little research may be required.

That really is it. So I hope this article has educated you a little and please feel free to leave a comment if you have any questions which weren’t addressed.