Before talking about security tokens we need to understand what is a security. Today we use the Howey test in order to "find" if something can be considered a security.

The Howey Test is a four-part test  used by the FCC to determine what is and is not a security. I think it’s important that we restate this four-part test. Something qualifies as a security if it involves:

1) An investment of money
2) A common enterprise.
3) With the expectation of profits.
4) Predominantly from the efforts of others.

in other words is like doing these questions “Is an investor contributing capital? Is the capital being contributed to a common enterprise that relies upon the work of others,” and the fourth part, most important part, “is there an expectation of profits?”.

So established what securities are, we can now talk about security tokens.

Image source: Pixabay/rawpixel

A security token represents traditional, private security interest. Essentially, they are an electronic wrapper to what we have today on paper.

So security tokens can represent ownership claims in all the things you’d normally think of as investment vehicles, stocks, bonds, treasury notes, real estate investments, fractional ownership of a piece of an art, etc..

When securities are tokenized or digitized they can be traded orders of magnitude, faster, cheaper, and easier, and that leads to transformative uses.

Securities tokens provides enormous value to private companies because they unlock liquidity, so where they want to lock up the capital, but not the investor, it’s a great solution.

I'll talk about the benefits of security tokens in later posts.

image source: Pixabay/PublicDomainPictures