In the cryptocurrency and blockchain industry where regulators are particularly strict, properly defining terms is extremely crucial. One term that has brought about many problems to cryptocurrency-related start-ups is ‘security token.’
Joshua Stein, CEO of tokenized securities startup Harbor, talks to Fortune about security tokens and explains their role in crypto regulations.
According to Stein, security tokens represent “traditional, private security interest.” That means it a security token can represent a company share, a limited partner interest in a fund/trust, or even a member share in a limited liability company (LLC):
“Essentially, you’re taking something that today you have on paper and you’re putting an electronic wrapper around it.”
When asked about the role Harbor plays in the process, Stein answers:
“There’s a little bit of programming in that token, but it calls to Harbor every time that token goes to trade. Harbor is the trade-compliance gatekeeper, and we check if the trade is compliant.”
He continues on saying that Harbor checks whos, whats and wheres of the trade. If the details are compliant, the trade pushes through and “no one even knows Harbor was involved.” If trades are found to be non-compliant, they stop the trade.
With regards to the difference between security tokens and utility tokens, Stein refers to utility tokens as protocol tokens, or tokens that “power” a decentralized software:
“You do not own anything in the company and there is no real world asset that backs it.”