Equity Tokens vs. Security Tokens: What is the Difference?

Understanding the Taxonomy of Digital Assets

For investors navigating the digital asset landscape, the terminology can often be confusing. Two terms that are frequently used—sometimes interchangeably and sometimes in opposition—are “security tokens” and “equity tokens.”

To understand the difference, you must look at the relationship between the technology (the token) and the underlying asset (what it represents). In short: A security token is the broad category, while an equity token is a specific type of asset within that category.

Was ist ein Sicherheitstoken?

A security token is a digital representation of an investment contract that is recorded on a blockchain. It is the technological wrapper that ensures the digital asset complies with securities regulations, such as the Securities Act of 1933 in the US.

According to the SEC, a digital asset is deemed a security if it passes the “Howey Test.” This test asks four key questions:

• Gibt es eine Geldanlage?
• Is the investment in a common enterprise?
• Is there an expectation of profit?
• Is the profit derived from the efforts of others?

If the answer is “yes,” the token is a security. This means it cannot be traded anonymously like a utility token. It requires strict Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. The security token is simply the technology that enforces these rules automatically.

What is an Equity Token?

An equity token is a specific sub-category of security token. It represents ownership (shares) in a company, DAO, or venture. Just as traditional stocks represent equity in a corporation, equity tokens represent the same legal rights, digitized on a blockchain.

Holders of equity tokens are typically entitled to:

• Voting Rights: The ability to vote on corporate decisions or board members.
• Dividends: A share of the company’s profits, often distributed automatically via smart contracts.
• Ownership Claims: A legal claim to the assets of the company in the event of liquidation.

Therefore, all equity tokens are security tokens, but not all security tokens are equity tokens.

Other Types of Security Tokens

To further clarify, here are other types of security tokens that are not equity:

• Debt Tokens: These represent a loan or bond. The holder is entitled to regular interest payments and the return of principal, but they do not own a piece of the company.
• Asset-Backed Tokens: These represent ownership in a specific physical asset, such as a piece of real estate, a painting, or gold.
• Fund Tokens: These represent a share in a managed investment fund, similar to an ETF or Mutual Fund.

Technische Normen

Unlike simple cryptocurrencies like Bitcoin, security and equity tokens require complex rules to ensure they are not transferred to ineligible wallets. Several standards have emerged to handle this.

ERC-3643 (The T-REX Standard)

The ERC-3643 is the industry standard for permissioned tokens on the Ethereum (ETH -0.61 %) blockchain. It uses a system of on-chain identity registries. Before a token transfer can occur, the smart contract checks if the receiver is a verified investor. If the receiver has not passed KYC, the transaction is blocked. This standard is widely used for tokenizing equity in private companies.

ERC-1400

The ERC-1400 is a comprehensive standard designed to act as a “library” of security token functions. It allows for complex features such as “partitions” (separating tokens into different tranches with different rules) and document management (attaching legal PDFs directly to the token metadata).

Polymesh

While Ethereum is a general-purpose blockchain, Polymesh (POLYX -5.38 %) is a blockchain built specifically for regulated assets. On Polymesh, identity verification is baked into the chain itself—users cannot even create a wallet without being verified. This provides a high-assurance environment for issuing equity tokens.

Zusammenfassung

When building a crypto investment strategy, accurate terminology matters. “Security Token” refers to the regulatory compliance layer—the technology that makes the token legal. “Equity Token” refers to the asset class—ownership in a business. As the market matures, we are seeing a shift from simple utility tokens toward these regulated, asset-backed instruments that offer investors legal protections and genuine ownership rights.