A security token is a token, issued on a blockchain, that represents a stake in some external enterprise or asset. These can be issued by entities like businesses or governments and serve the same purpose as their incumbent counterparts (i.e., stocks, bonds, etc.). Security tokens are similar to stablecoins related to FIAT money. At the contract level, both could even be identical as they function in the same way. The distinction occurs at the issuer’s level. Security tokens represent securities, such as stocks, bonds, or physical assets. Often (though it isn’t always the case), they grant the holder some kind of stake in a business or a specific project in that specific business for example the generation of profits on a specific Oilfield or Avionic network.

To draw on an example, let’s say that a company wishes to distribute shares to investors in a tokenized form. These tokens can be designed to come with all of the same benefits one would expect from shares – notably, voting rights and dividends. The advantages of this approach are numerous. As with cryptocurrencies and other forms of tokens, security tokens benefit from the properties of the blockchain they’re issued on. These properties include transparency, rapid settlement, no downtime, and divisibility.