Differences Between Non-Fungible Tokens and Security Tokens

Tokens generally are used to represent ownership on the blockchain, where they differ is in what they represent and the value they accrue to holders.

Differences between NFT and security tokens by definition

NFTs

Non-fungible tokens are so called because they are unique.  for instance, in the NFT art market for a collection of 10,000 art pieces, every piece is different because they possess certain characteristics that distinguish them from others. Taking this into the real world, things like a property title or any item that is not interchangeable with other items of the same class can be turned into NFTs. An NFT cannot be fractionalized, it is one unique token as no other copy can exist.

SECURITY TOKENS

They are fungible or interchangeable, many of them exist and they all mean the same thing. Can represent group ownership of an asset that is impossible to own in a group. For example, you could come up with one hundred tokens that represent a stake in a real estate asset.

Differences by Functions

NFTs can serve as proof of ownership of a unique and valuable asset on the blockchain. It could also serve as access keys to an application or a network where they may allow holders to have their voices heard on the network through voting, enable users to perform some actions within the frames of the ecosystem, or give access to functions provided directly by the token issuer. They may also serve as a unit of service that can be purchased.

Security tokens serve as a means of investment for the token holders. They offer equity, interest, dividend, or profit to holders, and are typically used to represent a stake in an income-producing asset or an asset expected to appreciate in value. They are fully compliant with regulations.

Misrepresentation of some security tokens as NFTs

According to the US security and exchange commission’s Howey's test, an investment contract will have the following characteristics:

• An investment of money,
• in a common enterprise,
• With the expectation of profit,
• To be derived from the efforts of others.

Certain NFTs may cross the line and begin to function as security tokens while being represented as an NFT thereby bypassing the necessary securities regulations by SEC or any other regulatory body.

If you buy a token that gives you an expectation of profit e.g. a token that has a royalty and is advertised as something that might appreciate in value by relying on the third party effort, it is more likely a security token than an NFT.

It is necessary for token issuers to take proper steps to protect investors. It is more in the interest of investors to ensure they are buying regulated securities.

Security tokens that are clear about being security tokens often have benefits like scam prevention

Because it is regulated, scams and attacks are much more unlikely. Regulated securities are managed under a cap table which represents ownership of an individual asset, this helps us know who owns what and is entitled to what. If these assets get hacked or stolen, they can be burned and re-issued to the rightful owner.

Unregulated NFTs on the other hand, do not allow any form of investor protection. if you mismanage your keys, you could lose your asset. If you do not have the right security protocols in place you could get hacked.