Security

What Is a Security?

Security refers to a fungible, negotiable financial instrument that represents some form of underlying value. Conceptually, a security involves investment and an expectation of profit. Many tokens are considered securities in the digital economybut do not contain the conventional elements of a security. 

Securitization is a way to package the cash flow from assets, including obligations, and sell them to investors. It allows asset holders access to liquidity and investors access to the value. It is a process by which traditional securities are created. It is also relevant to some of the use cases for security tokens and some of the more advanced digital asset finance processes that are emerging in the NFT and DeFi spaces. Thus, securitization offers opportunities for investors and frees up capital for originators (i.e. the company holding the assets), which promotes liquidity in the marketplace.

Security tokens are used to fractionalize asset ownership. They achieve similar effects to traditional securitization as they let illiquid asset owners access their investments. However, they are usually used to break up the value of a high-value asset rather than to pool the value of several low-value assets.