Is Bitcoin A Security Token?

The cryptocurrency space is full of jargon that can leave many scratching their heads. Whether you are starting out in cryptocurrency or blockchain or are an advanced trader, it is pivotal to understand the difference between security tokens and cryptocurrencies such as Bitcoin.

The Answer:

No, Bitcoin is not a security token.

Cryptocurrencies are the native asset 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 about by the implementation of smart contracts. Different 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 holds value. Some investments don’t 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 a stake in an external asset or enterprise. Security tokens can be issued by entities like governments or businesses and serve the same purpose as other financial instruments such as bonds or stocks. 

Why Use Security Tokens?

Unlike cryptocurrencies, security tokens can be digital, liquid contracts for ownership of a part of an asset. Security tokens can fractionalize any asset that already exists in the traditional market, no matter its size. For example, a company can distribute shares to investors in a tokenized form. These tokens can be designed to come with the same benefits you 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 they’re issued on. These properties include rapid settlement, transparency, no downtime and divisibility. 

  • Rapid settlement: In traditional markets, settlement and clearing have long been regarded as bottlenecks when transferring assets. On a blockchain, the process is automated and can be completed in minutes. 
  • Transparency: On a public ledger, the identities of participants are abstracted, but everything else can be audited. 
  • Uptime: Existing financial markets are open during fixed periods and are closed on weekends. Conversely, digital market assets are active 24/7/365. 
  • Divisibility: Security tokens present an opportunity for average retail investors to invest in art, real estate and other high-value assets. This feature improves accessibility and provides increased levels of granularity over investments.

What is a Cryptocurrency?

Cryptocurrency refers to the native asset on a blockchain network. A cryptocurrency is issued by the blockchain protocol on which it runs. It can be traded, used as a medium of exchange and act 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 notable losses in terms of purchasing power. A medium of exchange is an asset that can be used to acquire goods and services.  

Cryptocurrencies typically exhibit the following characteristics:

  • They’re built on a blockchain or other distributed ledger technology, allowing participants to enforce rules of the system in a trustless and automated manner.  
  • They’re 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 used by many as a speculative store of value. It is decentralized, meaning that no central authority controls it. Instead, Bitcoin is run 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 in a blockchain-based financial system. Layer 1 blockchains can finalize 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 native coin on an existing blockchain. While security tokens and cryptocurrencies such as BTC and ETH are nearly identical, the crucial difference lies in their purpose and actual use. A cryptocurrency is designed to be a medium of exchange on a blockchain whereas a security token is intended to be used the same way a bond, stock or other investment asset is used.  

Using the INX platform is a sensible way to trade these digital assets. The chance to trade digital securities with complete regulatory monitoring and top-notch security is a unique one provided by INX. The platform supports a number of security tokens and cryptocurrencies and was developed in accordance with SEC, EU, and FINRA rules.

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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