To better understand what security tokens are, it is important to first of all understand what securities mean. In clear terms, securities are tradeable financial assets such as debentures, promisory notes, bonds and shares. If we think of it as shares, it can be seen as a way to acquire part of ownership in a company without taking total possession of it.
Governments and companies use this approach to raise funds in the money and capital markets from investors. In return for their investments, these investors are entitled to rewards in the form of dividends or interest rates or share of company’s profit in some form or other.
When these type of financial activities are carried out through a cryptographic token, it is called a ‘Security Token’.
In simpler terms, security tokens are cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders. This takes care of the liquidity issues prevalent in modern day financial markets.
Previously, with traditional paper backed assets like company’s shares or bonds or real estate, liquidity was a problem, but the cryptographic representation of all these things in the form of “Security Tokens” can take care of that issue.