> ## Documentation Index
> Fetch the complete documentation index at: https://docs.theblockchainlibrary.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Security Token

> A blockchain-based token representing a regulated security or investment contract.

# 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](/categories/blockchain) — term
* [Cryptography](/categories/cryptography) — term
* [Web3](/categories/web3) — term

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**Canonical knowledge ID:** `glossary:security-token`