Definition
A security token is a type of digital asset issued on a blockchain that represents a claim on an underlying financial interest, such as equity, debt, or a share of profits. It is designed to fall within existing securities regulations, meaning its issuance, transfer, and ownership are governed by financial laws and compliance requirements. Security tokens typically encode rights like ownership, revenue sharing, or governance in a programmable format, while still being treated as regulated securities by authorities.
Unlike a Utility Token, which is primarily intended to provide access to a product or service, a security token is explicitly tied to an investment contract or financial exposure. Its classification usually depends on legal tests and regulatory frameworks that determine whether the token behaves like a traditional security. Because of this, security tokens often involve investor accreditation rules, disclosure obligations, and restrictions on secondary trading, even though they move and settle on blockchain infrastructure.
Context and Usage
Security tokens are commonly associated with tokenized versions of traditional financial instruments, such as equity in a company, real estate interests, or structured debt products. A Treasury Bill Token, for example, can be structured as a security token if it represents a regulated claim on government debt and is issued under securities frameworks. These tokens aim to combine the legal protections and familiar structures of conventional securities with the programmability and settlement efficiency of blockchain networks.
In decentralized finance and broader digital asset markets, security tokens occupy a distinct category that must be handled with regulatory compliance in mind. They may be listed on specialized platforms that support regulated trading and custody, and their smart contracts often incorporate restrictions that reflect legal requirements. As a concept, the security token highlights the convergence of traditional finance and blockchain technology, framing digital assets as legally recognized investment instruments rather than purely functional or payment-oriented tokens.