Tokenization is one of the most promising applications of blockchain technology

Tokenization

Tokenization creates a digital representation of an actual asset such as a currency, commodity, equity or other financial instrument, where each blockchain token represents a fractional ownership interest in that asset.

The tokens may be transferred on a blockchain shifting ownership of the underlying asset as the token moves from one person to the next – much like a dollar bill exchanging hands. Unlike cryptocurrencies, many tokens are not subject to risk of theft or loss via hacking or loss of encryption key because transfers are recorded by a registered transfer agent responsible for maintenance of the token ownership ledger. 

Why Security Tokens?

There has been an emerging trend in the blockchain industry to use blockchain technology to create tokens which represent direct interests in financial assets. These financial assets can include equity, debt, currencies, commodities, real estate and funds and derivatives of these assets.

These tokens are frequently referred to as “security tokens” because they are themselves generally treated as “securities” under US federal securities laws. In its simplest form, an equity or debt security or a fund of equity or debt securities (the US legal classification of which is well understood), when evidenced by a digital token, remains a security subject to the legal regime governing securities in non-tokenized form. In contrast, other financial assets such as commodities, currencies, real estate and certain interests in energy producing assets are not “securities” under US federal securities laws, however, most plans to tokenize these assets result in the creation of “securities” under US law.

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