What is a Security Token Offering, and how does it work?

David Azaraf | February 25, 2022
8 min read

As the world enters a new era of currencies and investments, now is the time to learn about security tokens, which will be a long-term fixture in our society. Security tokens are the present as well as the future. Regardless of your age, knowledge of Web 3.0 business, or understanding of it, learning about this type of investment could benefit your long-term financial health.

How does Security Token Offering work?

A Security Token Offering (STO) is a blockchain-enabled digital token representing a stake of ownership or a future benefit in an asset. STOs provide an ability for digital fundraising while adhering to all relevant regulatory standards. As a result of stringent rules, security tokens are not traded on typical stock exchanges.

Security tokens‍

Digital assets are similar to bitcoin and other cryptocurrencies. Utilizing blockchain technology, security tokens are comparable to bitcoin. Unlike bitcoin and other cryptocurrencies, security tokens are only digital representations of underlying assets and are distributed in a smart contract format giving you added security and protection. Blockchain technology offers several benefits to the sector. First, ownership is verified and recorded on a distributed ledger, which provides a more secure alternative than traditional methods. Additionally, blockchain technology facilitates the transfer of non-publicly traded alternative assets.

How is a Security Token Offering different from an ICO?

Initial coin offerings (ICO) are another way for companies to raise money via ICO trading platforms. An initial public offering (IPO) is when a private company offers shares to the public for the first time, and a company uses an IPO to raise money.

An STO requires a significant amount of pre-compliance preparation. Anyone can start an ICO and participate (unless their local laws say they can’t). However, in order for a company to offer an STO, they need to do it under a valid exemption or regulation so it can then be traded on a regulated platform. 

What is a token?

It is common in the cryptocurrency world to speak about “tokens.” All crypto-assets, including Bitcoin, may be referred to as “tokens” since they are all crypto-assets. However, the phrase has acquired two separate meanings that are common enough to be encountered.

One alternative meaning of the word “token” is a cryptocurrency asset operating on another currency’s blockchain. If you’re interested in decentralized finance, you’ll come across this word (or DeFi). Tokens like Chainlink, which operate on top of Ethereum’s blockchain, are DeFi alternatives to Bitcoin’s.

Automating interest rates to sell virtual real estate are just some of the uses for this second sort of token. However, it is possible to own and trade them like any other cryptocurrency.


What are security tokens?

Security tokens are not required to have a function, and the most common ownership represented by a security token is ownership or some other stake in the company issuing the token. Like purchasing stock shares in a typical stock market, security tokens are frequently referred to as security tokens.

By security tokens are digital assets stored on a blockchain. These tokens might represent ownership of a fraction or any valuable thing, such as a car, a house, or company stock.

Because conventional financial instruments and crypto-assets have several properties, there are numerous ways to take advantage of security tokens. In addition, security tokens may boost global financial markets by allowing more people to engage in the market.

Asset-backed tokens, equity tokens, and debt tokens are the three primary forms of security tokens. 

1. Asset-Backed Tokens   

Asset-Backed Tokens are backed by tangible assets, such as real estate or artwork. These tokens leverage the blockchain to keep a secure ledger of these assets. In addition to providing a specific audit record of transactions, these tokens may also maintain value, allowing them to function as digital assets.

2. Equity Tokens  

Since they represent company shares, an IPO and an STO  token are very similar. Holders of equity tokens are entitled to the same proportion of a company’s earnings and voting rights as shareholders. The critical contrast between average stocks and equity tokens is the method of recording ownership information. Traditional caches are issued on paper certificates and maintained in a dataset, while equity tokens will be stored on the blockchain.  

 3. Debt Tokens  

The functionality of debt tokens resembles that of temporary money that investors issue to a corporation. A ledger entry will be kept on the blockchain as security for the loan. The token price will be affected by the manner of payment and the risk of the loan. 

Crypto Token vs. Coin

A crypto token is a cryptocurrency sector, a virtual money token. It is a tradable asset or utility that exists on the blockchain and may be used for investment or economic purposes by the holder. Like fiat currencies such as dollars, euros, yen, etc., coins and tokens function as a store of value. However, there is an important distinction: digital coins are a kind of currency, while digital tokens represent anything that may be valued and is considered a security. Tokens and currencies reside on a blockchain, an encrypted database of digital transactions. For instance, the Ethereum blockchain is a log of Ether transactions, and the blockchain records the transfer of Ether currency or tokens based on Ether. Individuals and businesses keep their coins in password-protected digital “wallets.”

Blockchain Technology

Data may be stored in a digital database known as a “blockchain.” Data is stored in a digital database called a blockchain. Blockchain technology is critical to the security and decentralization of transactions in Bitcoin and Litecoin.

INX Token

The INX Security token made history as the first public offering of SEC-registered security tokens on the blockchain, and is currently traded on the INX Securities trading platform. 

When trading on the INX Securities platform,  a world of opportunities reveals. Individuals, businesses, and issuers can trade 24/7 365 from anywhere globally. Open an account with INX Securities now to begin your financial adventure.


What are the benefits of security tokens?

It may boost liquid assets, opens the market to a wider variety of participants, and makes it simpler for individuals to begin investing. People will be able to trade any help globally, and it will work without additional hassles and eliminate a lot of constraints from the system overall.

What are examples of security tokens?

There are three major categories of conventional securities: stocks, debt, and debt-equity hybrids. Examples of securities include stocks, bonds, exchange-traded funds, and futures.

How do you use security tokens?

You can use tokens for various reasons, such as trading, holding a store of value and, most interestingly, using them as a form of utility. 

What is the difference between security tokens and utility tokens?

Security tokens and utility tokens have a lot of similarities since they have identical offers in both categories. Both can be delivered to blockchain addresses; both are governed by smart contracts and maybe exchanged on exchanges via peer-to-peer transactions. The key distinctions are the economics and rules that govern them. To explain, utility tokens are not fundamentally valuable. If a project group is successful, investors will not be entitled to a percentage of the earnings. When investors acquire a security token, they buy shares, bonds, or derivatives. security tokens may be issued as investment contracts.


David Azaraf February 25, 2022

Crypto enthusiast, help businesses plug into the token economy


Most Popular

Token Offerings in 2023: STOs vs ICOs

5 min read

The Right Way for Sports Clubs to Do Fan Tokens

3 min read

Navigating the Fog of Inflation

0 min read

INX makes history with the listing of the world’s first SEC-registered digital security, collapses trading fees

2 min read