Clear DefinitionsSecurity Token
1 min read
Pronunciation
[si‑kyuh‑ri‑tee to‑ken]
Analogy
A security token is like a digital stock certificate—you hold it to claim dividends or voting rights in a company.
Definition
A token that represents a tradable financial asset—such as equity, debt, or profit share—and is subject to securities regulations.
Key Points Intro
Security tokens combine blockchain efficiency with regulatory compliance via:
Key Points
Regulated asset: Must adhere to securities laws (e.g., SEC rules).
Investor rights: May confer dividends, voting, or profit share.
KYC/AML: Issuers enforce identity verification for holders.
Transfer restrictions: Smart contracts can enforce lock‑ups and whitelists.
Example
tZero issues security tokens backed by real‑world assets; token holders receive dividends based on platform revenue.
Technical Deep Dive
Security token smart contracts integrate compliance modules: KYC/AML checks before transfer, whitelisting via on‑chain registries, and time‑based locking. They often implement ERC‑1400 or ERC‑3643 standards defining partitioned balances, issuance, and redemption functions. Token issuance events record legal agreements via Ricardian hashes.
Security Warning
Noncompliant transfers can trigger regulatory penalties; ensure smart contract enforces jurisdictional rules.
Caveat
Regulatory regimes vary by jurisdiction; a token compliant in one region may be illegal in another.
