Traditional securities are commonplace in investing, but they have received a blockchain boost through security tokens which operate as a digital form of these traditional financial tools.
Traditional securities are tradable financial assets that are purchased with the intention of holding them for investment. The idea is that if you hold them long enough, they can be resold for a profit. This is obviously quite similar to cryptocurrencies in general and thus there is a bit of a grey area around this.
Traditional securities include things like stocks, bonds, ETFs, options, and futures. And, because any of these things can be tokenized, they can become what is known as a security token. This involves tokenizing traditional assets, whereas some people will see cryptocurrencies as ready-made securities - but this is not true.
The likes of Bitcoin, Ethereum, and other traditional cryptocurrencies run on their own blockchains and are tokens of that chain. Whereas a security token can be implemented on an already existing chain. Ethereum is a popular choice to create security tokens on. Many companies use ERC-20 tokens for security tokens because of their built-in smart contracts used for execution.
There is still a lot of debate around the makeup of some cryptocurrencies and their potential to be deemed securities. The SEC in the US for example has declared outright that Bitcoin and Ethereum do not fall under securities law, but XRP from Ripple is under serious debate.
Securities on blockchains should be more purpose-built as tokenized and digitized assets intended to perform well and offer profits to the investors. Sometimes, investors can also earn profits through dividends in the form of additional tokens and they often get other benefits such as voting power. This is a way to bring securities trading into a new era of blockchain and digital potential.
Security tokens are a natural bridge between the traditional finance sector and blockchain and benefit both equally. There is the offer of fractionalization that comes with security tokens and these already exist in the traditional market. Many blockchain projects now have platforms that directly undercut the old ICO model by tokenizing equity rights for pre-IPO companies.