Security Token
A security token is a blockchain token that represents a financial claim, such as a share in a company, a bond, or a right to profits, and is therefore treated as a security under financial law.
What makes a token a security
The technology is the same as for any other token; what counts is the right attached to it. If holders invest money expecting a return from the work of others, or receive equity, debt or profit rights, regulators usually treat the token as a security. In the United States this is tested with the Howey test, from a 1946 Supreme Court case. In the EU, tokens that qualify as financial instruments fall under existing securities rules such as MiFID II rather than under the MiCA crypto regulation.
Some countries have written laws specifically for securities on a blockchain, for example Switzerland's DLT law of 2021 and Liechtenstein's Blockchain Act (TVTG), in force since 2020.
An example
Say a property company wants to raise 1,000,000 francs. Instead of paper shares it issues 10,000 tokens, each representing a share in the company and a claim to a part of its rental income. Ownership is recorded on a blockchain, and transfers can settle in minutes rather than days. The company still needs a prospectus or an exemption, and buyers usually have to pass identity checks.
Why it matters
Security tokens promise faster settlement, fewer intermediaries, round-the-clock transfer and the ability to split assets into small units. Because they are regulated, holders also get legal protections that most crypto tokens do not offer, such as disclosure duties and enforceable claims.
Limits and risks
Many security tokens can only be sold to verified investors and through licensed venues, so trading can be thin and selling quickly may be hard. The token is only worth what the legal claim behind it is worth: if the issuer fails or the paperwork is weak, the blockchain record does not protect you. Projects that sell tokens as utility tokens while promising profits may in fact be issuing unregistered securities, which has led to enforcement actions.
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Frequently asked questions
What is the difference between a security token and a utility token?
A utility token gives access to a product or service, while a security token represents an investment claim such as equity, debt or profit share. The label a project chooses does not decide this; the actual rights and expectations do.
Can anyone buy security tokens?
Often not. Depending on the offering, buyers may need to pass identity checks or qualify as professional or accredited investors.
What is an STO?
A security token offering is a sale of security tokens to raise capital, carried out under securities law, unlike the largely unregulated ICOs of 2017.
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