A security token is a representation of a real asset on a blockchain. It is therefore collateralized with a real asset, for example a commodity, real estate or a share in a company.
In most cases, security token holders have the possibility to redeem their tokens for the underlying security. Theoretically, every asset can be tokenized and displayed on a blockchain. Since they are stored on a blockchain, they have some advantages over their physical counterparts:
Divisibility and transferability
Due to the easy divisibility of a security token, markets of particularly expensive assets (art, real estate, etc.) become accessible for smaller retail investors. Especially the partial ownership of assets will improve the accessibility for investors. Assets such as real estate, private equity and works of art could gain liquidity with increasingly easy transferability.
Asset tokenization enables the use of smart contracts to automate processes such as settlement, compliance, distribution, reporting, etc. For example, the dividends of a stock could be distributed completely automatically via the security token.
Other benefits include block chain transparency, global transferability, 24/7 markets and low transaction costs.