The cryptocurrency space is full of jargon that can leave a lot of people scratching their heads. Whether you are new to cryptocurrency or blockchain or you are an advanced trader, understanding the difference between security tokens and cryptocurrencies such as Bitcoin is essential.
No, Bitcoin is not a security token.
Cryptocurrencies are the native asset of a blockchain – like ETH or BTC. However, the tokens are created as part of a platform built on an existing blockchain. Unlike cryptocurrencies, the behavior of tokens is not built into the blockchain itself; instead, it happens through the implementation of smart contracts. There are different types of tokens, including utility tokens and security tokens.
What is a security token?
A security is a financial instrument with two main characteristics: it can be traded and it has value. Some investments do not fall under this definition, including many cryptos, but most do. Some of the most common types of securities include bonds, stocks, options, and mutual funds. However, blockchain technology is poised to disrupt long-running financial markets with security tokens.
A security token, issued on the blockchain, represents a stake in an external asset or company. Security tokens can be issued by entities such as governments or companies and serve the same purpose as other financial instruments such as bonds or stocks.
Why use security tokens?
Unlike cryptocurrencies, security tokens can be liquid digital contracts for ownership of part of an asset. Security tokens can split any asset that already exists in the traditional market, regardless of size. For example, a company may distribute shares to investors in token form. These tokens can be designed to provide the same benefits you would expect from stocks, such as dividends and voting rights.
As with cryptocurrencies and other forms of tokens, security tokens benefit from the properties of the blockchains on which they are issued. These properties include fast settlement, transparency, no downtime, and severability.
- Rapid settlement: In traditional markets, settlement and clearing have long been considered bottlenecks when transferring assets. On a blockchain, the process is automated and can be completed in minutes.
- Transparency: On a public ledger, the identity of participants is summarized, but everything else can be audited.
- Availability: Existing financial markets are open for fixed periods and closed on weekends. Conversely, digital market assets are active 24/7/365.
- Severability: Security tokens offer average retail investors an opportunity to invest in art, real estate, and other high-value assets. This feature improves accessibility and provides increased levels of investment granularity.
What is a cryptocurrency?
Cryptocurrency refers to the native asset on a blockchain network. A cryptocurrency is issued by the blockchain protocol it runs on. It can be traded, used as a medium of exchange, and serve as a store of value.
A store of value is an asset that can be held or exchanged for fiat currency at a later date without incurring significant losses in purchasing power. A medium of exchange is an asset that can be used to acquire goods and services.
Cryptocurrencies generally have the following characteristics:
- They are built on blockchain or other distributed ledger technology, allowing participants to enforce system rules in an automated and trustless manner.
- They are decentralized, or at least do not depend on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and verify transactions.
- They use cryptography to secure their underlying system and network structure.
What is bitcoin?
Bitcoin is a form of digital currency and is used by many as a store of speculative value. It is decentralized, that is to say that no central authority controls it. Instead, Bitcoin is run by thousands of computers spread all over the world.
In technical terms, Bitcoin is classified as a Layer 1 blockchain – a type of project that represents the core network or underlying infrastructure in a blockchain-based financial system. Layer 1 blockchains can finalize and validate transactions without the help of another network. They also have their own native token, which is used to pay transaction fees.
It is clear that Bitcoin is not a security token. Unlike tokens, Bitcoin is the native coin of an existing blockchain. While security tokens and cryptocurrencies such as BTC and ETH are nearly identical, the crucial difference lies in their purpose and actual use. A cryptocurrency is designed to be a medium of exchange on a blockchain, while a security token is intended to be used similarly to a bond, stock, or other investment asset.
Using the INX platform is a smart way to trade these digital assets. The ability to trade digital securities with full regulatory oversight and top-notch security is unique, offered by INX. The platform supports a number of security tokens and cryptocurrencies and was developed in accordance with SEC, EU and FINRA rules.
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