What is a security token?

A security token is defined as a digital asset that represents ownership in a real-world asset. This can include various forms of financial interests, such as equity in a company, a share of profits, or a stake in an underlying asset like real estate or commodities. The key feature of security tokens is that they are often regulated under securities laws, meaning they provide certain rights and obligations akin to traditional securities like stocks and bonds.

This regulatory framework helps ensure that investors are protected and that the investment meets legal standards. The connection to real-world assets not only provides intrinsic value but also enables token holders to benefit from the asset's performance, such as through dividends or profit-sharing, thus enhancing their appeal in the investment landscape.

Other choices refer to concepts that do not align with the definition of a security token. Physical currency, unregulated cryptocurrencies, or assets solely used for trading do not encapsulate the essence of what a security token represents.