Is Bitcoin a Security Token?

The cryptocurrency space is full of jargon that can leave many scratching their heads. Whether you are starting out with cryptocurrency or blockchain or are an advanced trader, understanding the difference between security tokens and cryptocurrencies like Bitcoin is critical.

The answer:

No, Bitcoin is not a security token.

Cryptocurrencies are the original resource of a blockchain – like ETH or BTC. However, tokens are created as part of a platform that is built on an existing blockchain. Unlike cryptocurrencies, tokens’ behavior is not built into the blockchain itself; instead, it comes through the implementation of smart contracts. Various types of tokens – including utility tokens and security tokens – exist.

What is a security token?

A security is a financial instrument with two primary characteristics – it can be traded and it has value. Some investments do not fall under this definition, including many cryptos, but most do. Some of the most common types of securities include bonds, stocks, options, and mutual funds. However, blockchain technology is poised to disrupt long-standing financial markets with security tokens.

A security token, issued on the blockchain, represents an ownership stake in an external asset or business. Security tokens can be issued by entities such as governments or businesses and serve the same purpose as other financial instruments such as bonds or shares.

Why use security tokens?

Unlike cryptocurrencies, security tokens can be digital, liquid contracts for ownership of a portion of an asset. Security tokens can fractionalize all assets that already exist in the traditional market, regardless of size. For example, a company may distribute shares to investors in a tokenized form. These tokens can be designed to bring the same benefits you would expect from shares, such as dividends and voting rights.

As with cryptocurrencies and other forms of tokens, security tokens benefit from the properties of the blockchains on which they are issued. These features include fast settlement, transparency, no downtime and sharability.

• Fast settlement: In traditional markets, settlement and clearing have long been considered bottlenecks when transferring assets. On a blockchain, the process is automated and can be completed in minutes.
• Transparency: On a public ledger, the identity of the participants is abstracted, but everything else can be audited.
• Opening hours: Existing financial markets are open during fixed periods and are closed at weekends. Conversely, digital marketing assets are active 24/7/365.
• Divisibility: Security tokens provide an opportunity for average retail investors to invest in art, real estate and other valuable assets. This feature improves accessibility and provides increased levels of granularity in relation to investments.

What is a cryptocurrency?

Cryptocurrency refers to the original asset on a blockchain network. A cryptocurrency is issued by the blockchain protocol it runs on. It can be traded, used as a medium of exchange and function as a store of value.

A store of value is an asset that can be held or exchanged for fiat currency at a later date without incurring significant losses in terms of purchasing power. A medium of exchange is an asset that can be used to acquire goods and services.

Cryptocurrencies typically have the following characteristics:

• They are built on a blockchain or other distributed ledger technology, so that participants can enforce the system’s rules in a reliable and automated way.
• They are decentralized, or at least not dependent on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and verify transactions.
• They use cryptography to secure their underlying network system and structure.

What is Bitcoin?

Bitcoin is a form of digital currency and is used by many as a speculative store of value. It is decentralized, meaning that no central authority controls it. Instead, Bitcoin is powered by thousands of computers distributed around the world.

In technical terms, Bitcoin is classified as a Layer 1 blockchain – a type of project that represents the base network or underlying infrastructure of a blockchain-based financial system. Layer 1 blockchains can complete and validate transactions without the help of another network. They also have their own native token, which is used to pay for transaction fees.

The takeaway

It is clear that Bitcoin is not a security token. Unlike tokens, Bitcoin is the original coin on an existing blockchain. While security tokens and cryptocurrencies like BTC and ETH are almost identical, the crucial difference lies in their purpose and actual use. A cryptocurrency is designed to be a medium of exchange on a blockchain, while a security token is intended to be used in the same way as a bond, stock or other investment asset.

Using the INX platform is a sensible way to trade these digital assets. The chance to trade digital securities with full regulatory oversight and first-class security is uniquely provided by INX. The platform supports a variety of security tokens and cryptocurrencies and was developed in compliance with SEC, EU and FINRA regulations.

Image taken from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and is not intended as investment advice.