Understanding Tokenized Securities
Tokenized securities are a method of representing ownership of a security by issuing a token on a blockchain-based distributed ledger technology (DLT) infrastructure. These tokens can represent various types of securities, such as equity, bonds, and investment funds.
Tokenization involves converting ownership rights to an asset into a token. In the case of tokenized securities, this means creating a tradable financial asset on a blockchain that represents an investment in another asset.
Securities are negotiable financial assets that have value and can be classified into different types. Equity refers to investments in common or preferred stock issued by other companies. Debt represents borrowed money that must be repaid. Investment funds are pools of capital owned by multiple investors, used to collectively purchase securities or assets, with each investor retaining their individual ownership percentage.
Tokenized securities can also represent ownership in liquid assets such as real estate and fine art. These tokens facilitate easy trading and reduce barriers to entry in the markets.
A token representing ownership rights can be subdivided and traded, with all trades and ownership recorded on a blockchain system. The distributed ledger technology, originally developed for cryptocurrencies, eliminates the need for third-party recordkeepers. Blockchain technology uses complex algorithms to maintain transaction ledgers and verify ownership. Security token offerings create these tokens, which are backed by tangible securities, while cryptocurrencies are regulated based on the jurisdiction in which they are offered.
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