War of the Words: Digital Security vs. Security Token

In the nascent space of security tokens (or is it digital securities now..?), there has been much confusion surrounding the proper nomenclature to use. Terms like “tokenize” and “digitize” are often used interchangeably with no clear rhyme or reason as to why one term is taking precedence over another.

Much of the confusion and lack of set rules stems from the fact that the industry is still putting out feelers to see which terms resonate best with their audiences. For the crypto-literate crowd, “security token” makes perfect sense. If you’re tokenizing an asset, it’s only logical that the output is a security token. But for those less familiar with the space, words like “token” and “coin” immediately tie back to complex concepts associated with cryptocurrencies and the prices of bitcoin or “How-The-Hell-Is-This-Legal Coin”.

As a quick primer, a digital security (or security token; who knows, right?) represents ownership in a tradable asset that is recorded on the blockchain. Venture capital funds, currencies, gold, art, and real estate are all examples of types of assets that can be “tokenized”. Much of the benefit derived from tokenization stems from the programmable ownership of assets, which creates a more efficient way to trade and achieve liquidity (think the efficiency levels between communicating via snail mail vs email). Additionally, tokenization enables fractionalized ownership which helps to decrease barriers to entry for investors, thereby creating opportunities for many more participants in the investment market.

RealBlocks team… which terms should I use? I’m begging you.

There’s a lack of consistency when it comes to the terminology in this space; we’ve seen instances of “security token” and “digitization” used in the same sentence as “tokenizing digital securities.” Quite frankly, it can be incredibly confusing for people who operate in the space, let alone for those attempting to educate themselves on the subject. So instead of talking about the “digital blockchain tokenization of securitizational tokens”, the industry can greatly benefit from consistent nomenclature that is easy to understand.

So how are we at RealBlocks treating this matter at hand…

Tokenization is the digital representation of assets recorded on the blockchain. To us, this is the best term to properly describe the process, largely due to the fact that the alternatives don’t accurately describe the process. There’s potentially an argument to be made for a term like “digitization”, but 1) it’s cumbersome and clunky (who wants to listen to a TED talk that’s largely comprised of the speaker fumbling over the pronunciation of the topic at hand?) and 2) we feel that the word “digitization” can be attributed to multiple other processes and could cause confusion (scanning images/documents, digital video conversion, etc.).

The process of tokenization, however, allows for the issuance of digital securities. After many meetings with individuals in the financial services industry, we found that the best way to describe what we do was to state that we can issue digital securities that, in our case, represent ownership in real estate funds or offerings. The term “token” often led to much confusion about what we were providing, or what our business model was. “Is that like bitcoin?” or “So when are you doing an ICO?” are just some of the questions that we’ve fielded in the past. Digital securities, however, resonated far better with our audience due to the familiarity factor associated with securities.

Read our White Paper for more information.

Why does this even matter?

Throughout history, the adoption of ideas and movements can be tied directly to the diction being used. Delivering a palatable or understandable term may be the difference in something gaining traction, or falling to the wayside. It’s why Apple touts its “Liquid Retina Display” instead of its “High Pixel Density Display”; it’s why in the early 2000s, the term “death tax” was used as a substitute for “estate tax” by the GOP because “who wouldn’t be opposed to a ‘tax on death’?” And perhaps even more ominous, it’s why starfish aren’t called star-echinoderms (though Big Starfish certainly doesn’t want you reading that).

Joking aside, the use of particular terminology is key in getting one’s message across. In the case of digital security vs. security token, much of our decision to side with digital security stems from the pre-existing knowledge base of our intended audience. As with any new technology or system, there is a layer of education that needs to be had. It’s up to us as educators, in this instance, to make that learning process as simple and intuitive as possible. An immense hurdle for many to clear is the ability to make a hard-line distinction between security tokens and other cryptocurrencies. It’s also a hurdle that is largely unnecessary. The simplicity of digital security comes from the fact that the general audience already knows what a security is, and they already understand the idea of something being digital. Why bog them down with additional complexities? Ultimately, we as an organization feel that using digital security instead of security token is the best path forward in helping to properly communicate the use case of tokenization and blockchain, while also being something that is easy to understand for those just entering the space.