Security Tokens Explained: The Impact of the Ethereum Blockchain

Tokens are a different creature than cryptocurrency coins. Tokens were introduced on the Ethereum blockchain and eventually classified based on their function and purpose. Three main types of tokens resulted: (1) security token; (2) utility token; and (3) non-fungible token (NFTs). First, security tokens are ownership tokens and function much like traditional securities. Think of them as shares or bonds embodied as a crypto token—a digital company share. The SEC generally views security tokens as a “security” for registration purposes under the federal securities laws. Security tokens are explained below. Second, utility tokens serve only one function and are issued for that specific purpose. Think of them like a casino chip or arcade token. The ways they can be used differs depending on the purpose for which they are issued. These tokens’ price is driven by supply and demand. Last, NFTs are unique digital assets that can be bought and then traded. The NFT purchase is stored on the public blockchain, which serves as evidence of ownership of the one-of-a-kind NFT. Tokens can be offered to the public through either ICOs or a newer form, called security token offerings—STOs.