Cryptocurrency is slowing becoming accepted worldwide. This brings a number of questions about cryptocurrency and how it can be used in investments. There are many facets to cryptocurrency, such as cryptocurrency coins and security tokens. When it comes to investments, a security token is used. Essentially, it is a cryptocurrency (crypto) token that has passed the Howey Test. This test determines if the crypto token can be classified as a security and be regulated. A security token derives its value from an asset that is tradeable. If a security token is deemed a security, it must be regulated by the Securities Exchange Commission.
A security token should not be confused with a cryptocurrency coin (or altcoin). Altcoins are an alternative to Bitcoin (e.g. Ducatus coin) based on how they are made. Many altcoins are built using Bitcoin’s “open-sourced, original protocol with changes to its underlying codes.” This is how other cryptocurrencies are made, such as Peercoin and Namecoin. The other cryptocurrency that is not made from Bitcoin’s open-sourced protocol is Ethereum. As mentioned above, security tokens are used in investing, since they represent an asset or utility. Security tokens reside on top of another blockchain, not in it. Like an asset, a security token can be traded (e.g. commodities). Another stark difference between the two is how security tokens are distributed to the public. These tokens are distributed through an initial coin offering (ICO), which is similar to an initial public offering (IPO) for stocks.
Security tokens are profitable because they pay interest, dividends or share profits. They can also be invested in other tokens or assets (e.g. shares). Since they aren’t backed by traditional paper, they is nothing to liquidate. Security tokens are “programmable security,” since you are paid on a certain date upon meeting certain criteria through a smart contract. Unlike cryptocurrency coins, there will need to be a new infrastructure for security tokens per their functions. When using security tokens, be sure that they are regulated and aren’t used as utility tokens.
Security tokens are a new way to invest, much like cryptocurrency is a new way to make purchases. They both rely on blockchain and can be profitable. There could be more regulations applied to them in the future as they become mainstreamed in our lives.