Understanding what Securities are

Dec 15, 2021

The term "securities" is of increasing interest in financial circles, and we are not referring to cybersecurity. In simple terms, a security in the European Union (EU) is a financial instrument that represents an ownership interest or investment in a company. Securities can be bought, sold or traded and are often used by companies to raise capital.

When a company turns to Token City, what we do is use blockchain technology so that that company's security can be issued, managed and traded as easily as any other digital item. The ability to register financial instruments on blockchain, including those that are considered a security, is revolutionizing the financial sector on a global scale.

What a Security is in the European Union

In the EU, the key criterion for classifying financial instruments that are considered securities is their transferability. The easier it is to send and receive a financial instrument, the more likely that it will be legally considered a security in EU countries. Without going into detail, these are the main categories of securities:

  1. Stocks: This type of security represents an ownership interest in a company. Its holder owns a part of the company and therefore has the right to receive income if the company is sold, if it generates dividends, etc.
  2. Debt securities: These are debt instruments issued by companies. Those who acquire these debt securities from the company are lending money to the company in exchange for a commitment to be repaid with interest at a later date.
  3. Other marketable securities: There are several types of security that are more complex and can be bought and sold, such as options and futures contracts. This is a type of security whose trading is usually limited to experts.

Since the definition of security in the EU covers a wide range of financial instruments, the regulatory body to cover them all is extensive, and aims to protect investors, promote market transparency and ensure financial stability. Each EU member state, together with the European Securities and Markets Authority (ESMA), is responsible for regulating and enforcing the law in relation to securities.

Que es un security, tokenización

What a Security is in the USA

While in the European Union we focus on the transferability of digital instruments to determine whether they are classified as a security, in the United States a simple method has long been established to determine what a security is. It's the Howey Test, which consists of these four questions:

  • Is there an economic investment?
  • Is the investment related to a company?
  • Does the investment involve an expectation of profit?
  • Are the profits earned by the investor the result of the efforts of a third party?

If the answer to all these questions is yes, then we are undoubtedly dealing with a security. The test arose in a U.S. court case against a businessman named Howey in 1946. The U.S. Supreme Court ruled that a security is a transaction whereby a person invests their money in a "common enterprise" with the expectation of profit derived from the efforts of that enterprise. This definition applies to corporate stock, credit rights and other types of security.

Practical examples of security

When we buy shares in a company we are investing that money with the expectation that the company and its shares will increase in value so that we can sell them at a profit. Whether or not we can profit from this investment will be entirely the result of the company's work.

Similarly, when we lend money to a company, we are investing money in exchange for the right to be repaid with interest over a predetermined period, and the borrower will fulfill our financial right to be repaid solely through its work.

As we have seen, while the Howey Test helps to easily conceptualize what a security is, it does not apply in the case of the European Union. The EU regulation focuses on the "transferability" of a security to define and categorize it as such, which is significantly different from the US approach based on determining what a security is with the Howey Test.

Entra en la nueva economía tokenizada

Enter the new tokenized economy

Token City is the ultimate bridge to the tokenized economy (tEconomy), in which tokenized companies (tEnterprises) create their cryptoasset markets (tMarkets), open to global investors (tCitizens).

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