What is a security token?

Think of a share that, instead of being recorded only in a conventional register, is represented by a token on a blockchain. Its holder may be entitled to a dividend or a vote, depending on the terms of issue. That’s a typical use of security tokens, i.e. digital representations of financial securities.

“Security” here means a financial instrument, not computer security. It doesn’t describe a token that is better protected against attacks.

The issuer sets the rights and terms, while a smart contract can handle issuance and transfers. For example, a token representing a bond may carry the right to receive interest and the repayment of principal. The blockchain records the movements, but the legal force of the rights doesn’t come from the code alone.

Why it matters

Unlike a utility token, which usually gives access to a service, a security token is tied to investor rights. But how it’s classified doesn’t depend on the label its team picked. What counts are its actual features and the applicable law.

The technology can make it easier to automate payments and transfer securities. It doesn’t, however, eliminate intermediaries or rules. Holder identification, eligibility checks and restrictions on transfers between wallets may be required.

What to watch out for

A security being on a blockchain doesn’t guarantee returns, the ability to sell right away or protection if the issuer goes bankrupt. There are also technical risks, such as bugs in the smart contract or losing access to the wallet.

We focus on exactly what the holder is entitled to: who takes on the obligation, which documents back it up and how it can be enforced in practice. A token linked to real estate, for example, doesn’t automatically give you direct ownership of the property.

In Greece

For readers in Greece, the key distinction is that tokens classified as financial instruments are excluded from MiCA’s scope. They fall under the relevant framework for financial instruments. The exact treatment requires checking the specific issue, not drawing conclusions from the word “crypto” alone.