The hype behind security tokens

By Artūras Svirskis on ALTCOIN MAGAZINE

It all seems very complicated when you try to determine what exactly a security token is. There is new terminology, many new interpretations, and denotations emerging every day; therefore, it is becoming confusing. It’s important to understand what security tokens are and how they work. Here are my interpretation and comprehension on this eminent topic.

So what is a security token? How does it work and what are its purposes? There are so many conjectures, definitions, articles, studies on simply the definition, not talking about its usability, adoption, hindrance and the many other aspects that it involves. To put it simply, most categorize tokens into two categories: Utility tokens and Security tokens. Briefly on utility tokens and how they differ from security tokens. If a token doesn’t pass the Howey test, then it can be classified as a utility token and contrary, a security token. They are simply app “coins” that authorize access to an amenity or offered product. Security tokens are crypto tokens that pass the Howey Test.

I mentioned the Howey test, not going into depth about it, it is briefly a rudimentary rule that was created to determine if an asset of some sort can be termed as an “investment contract”, and categorized as security. In most explainers, you can find three key factors of the Howey test:

1. There is an investment of money;

2. The investment comes with an expectation of profit;

3. This expectation of profit derives largely from the efforts of others;

Instead of offering a concrete and substantial benefit to an investor, security tokens generally represent a share in the company who issued it. Security tokens are also sometimes referred to as equity tokens, and are juxtaposed to buying shares in stock markets. Those who are attentive to stock markets know that it presents fractional ownership of a company. They submit to various federal securities, laws, and regulations.

Purposes, to name a few, go as far as impacting crypto marketing, bettering asset management, needing fewer security lawyers, financial alterations, crowd-funding, ameliorating the know-your-customer (KYC) process.

Overall, not all are on board with security tokens. They have much less space in the market, compared to utility tokens. 2018 was predicted to be the year for security tokens, and that a substantial amount of capital will go from Wall Street to security tokens instead of utility tokens, but it was more of a year of reckoning and confederation. For 2019, many even speculated that ICO’s will be replaced by security tokens, but alternatively, the shouldn’t be seen as a replacement. We can estimate that 2019 or even 2020 will be the year for security tokens, but it all comes down to different aspects and facets that can’t be predicted.

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