Fundamentals of a Security Token

Security tokens will provide greater functionality, lower costs, faster speeds, and increased transparency to financial markets. Tokenization is the process whereby the rights to a real‐world asset are converted into a digital security that can be housed, subdivided, and traded on a blockchain system. Digital securities have been divided into the categories of payment tokens, utility tokens, and asset tokens. This chapter looks at each of these categories through the lens of their specific characteristics, the different rights they convey, the ways in which they are regulated at a high level, and the mechanisms necessary for their transfer. The level of regulation that falls on utility tokens is fairly minimal and lies somewhere between what is required of payment tokens and security tokens. The chapter addresses regulation in‐depth and summarizes that regulation is quite strict for a security token. It looks at some of the enormous benefits security tokens possess.