Security tokens explained

Token Classes: Security tokens explained

After our previous article on token classification, it’s important to have a balanced explanation regarding the other type of token classification: the security token.

What are security tokens?

The Security and Exchange Commission (SEC) describes security tokens as every token, regardless of their nature, that meets the rules as stated by the SEC to depict security, and these rules include the following: 

  1. An individual buys the security token expecting a future profit;
  2. An entity is in charge of it, and it’s not governed by a democratic network governance model.

For this, many tokens in the crypto space may never be defined as security tokens as many projects come into existence by developers to create wealth for themselves without considering others would invest in such tokens. 

A classical example would be the Onecoin project which saw the team generate a whooping sum of over $10billion and the team members disappearing into thin air to date. 

The participants of the token then we’re meant to bear the pains of the funds swallowed up by the team who set up the project.

Another classical example in the crypto space is the Bitconnect platform which was believed to be one of the most trust staking platforms at that time. 

Individuals invested their money in the project with the goal of making awesome profits for staking their Bitcoins and it was later revealed that the team members were basically scammers who were able to swindle the users by collecting their Bitcoin only to give them a worthless Bitconnect token all in the purpose of giving value to the users.

However, a security token from another point of view can be seen as a token that may be a kind of tradable asset such as shares, bonds, notes, voting rights, options, debentures, and warrants. 

Actually, if you think about stocks, you would be able to get the idea in a more clear way – if you own shares or stocks, you are invariably considered a part-owner of a company without actually taking real-life possession of it.

The same can be said about security tokens in a like manner. 

Can any project have security tokens? 

No. Actually, very few projects can boast of meeting the SEC requirements to be listed and referred to as security tokens. 

Those requirements have limited the companies associated with the production of such tokens, so they look for alternatives in order to onboard new investors into their projects, hence the need for most projects to create utility tokens to help propagate their project and seek new investors. 

Consequently, all the skills associated with the programming ability of any security token ecosystem can speed up the process and can transition from a typical form to many more. 

In other words, as the company grows, so will the profit, and the entire features will increase for every token.

As a consequence if an entity cannot be able or fails to provide the features they have drafted in the schedule plans to give the users; they will have to face legal issues – so you won’t be kept hanging out in the air with regards to your investment in such projects.

How do tokens become a security asset?

Firstly, a project developer will request to issue a security token that will represent a portion or shares of the enterprises. 

After that, the team will create a whitelist containing the wallet addresses of the investors who can participate in the token sale.

It is often the case that the listed investors in the whitelist would have to prove their compliance with the rules and regulations set by the issuer. 

The laws vary with each security token ecosystem (which is expected to be clearly stated), so you might see a lot of variations if you invest in a lot of top security tokens.

All of these are in line with the global best practice in close connection to AML and KYC regulations along with proving your identification with credible sources. 

This is not to say that every security token is backed by hundreds of regulations. 

However, the issuer (or project team) could compare with a large number of regulations to filter out the investors more easily.

In conclusion, as the name suggests, security tokens have some level of security attributed to them, as users would also have to comply with the KYC/AML to be whitelisted. 

So, if someone does break in and hack their way to your wallet, you would be able to trace it back to their whitelisted wallet and then take legal actions against such a person whose details become exposed to the whitelisted documentation.

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Disclaimer: This article is for informational purposes only. The information does not constitute an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Klever.Finance does not provide financial, tax, legal, or accounting advice. There is no responsibility on the part of the company or the author for any loss or damage arising from or related to the use of or reliance on any content, goods or services mentioned in this article.

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