A security token is a digital contract that represents a piece of a marketable asset. Security tokens represent a portion of ownership in financial assets such as stocks and bonds, as well as a profit promise. Security tokens are issued through initial coin offerings and exchanged on blockchains (STOs). STOs are more regulated than initial coin offers, lowering the chance of fraud. STOs allow fundraisers who tokenize financial assets to access a large audience on open marketplaces. Because blockchains are public, securities exchanged as tokens gain from transparency. Security tokens also allow for the division of illiquid assets. Security tokens are subject to government regulations, and rules violations might result in penalties. Tokens, on the other hand, frequently make use of exemptions to get around the law In the United States, securities are governed by the Howey Test. The securities must be an investment of capital into a joint company with the expectation of benefit owing to third-party efforts, according to the test.
