Security Token
A blockchain-based token representing a regulated security or investment contract.Definition
A blockchain-based token representing a regulated security or investment contract.Why it matters
Tokenization concepts connect blockchain infrastructure with legal or economic rights in real-world assets.How it works
Security tokens are issued via smart contracts that contain compliance logic, such as ‘transfer-restricted’ functions. Every investor must pass identity checks before they are added to the whitelist. The token tracks ownership on the blockchain and can automatically enforce rules like holding periods.Real-world example
The tZERO platform facilitates the trading of security tokens, including digital representations of company shares that pay dividends.Advantages
- Compliance with financial securities laws
- Efficient, automated dividend payouts
- Direct ownership verifiable on-chain
- Reduced administrative and brokerage overhead
Limitations
- Higher costs for legal structuring
- Limited secondary market options for trading
- Rigid regulatory landscape across borders
Common misconceptions
- Many confuse security tokens with utility tokens or cryptocurrencies. People also wrongly assume that having a ‘token’ makes the investment inherently liquid or easy to trade.
Related knowledge
- Blockchain — term
- Cryptography — term
- Web3 — term
Canonical knowledge ID:
glossary:security-token