Digital Securities Explained for Dummies

What are digital securities?

Simply put, digital securities, also referred to as security tokens or tokenized securities, are digital representations of securities, which are financial instruments of value.

Express differently, digital securities replace traditional documents that serve as legal proof of ownership of securities, such as paper share certificates, also called stock certificates, issued by companies.

What are securities?

Securities, also called financial securities, refer to tradable, fungible, and negotiable financial instruments that are used by companies and corporations to raise money.

A financial instrument is tradable when it can be purchased or sold on various financial markets.

Fungible financial instruments are interchangeable, implying that they can be substituted for something of equal value. Examples of fungible financial instruments are ordinary shares of companies, bonds, and futures contracts.

Negotiable financial instruments can be exchanged, transferred, or bought and sold between numerous parties, implying legal ownership can exchange hands.

Traditional securities

Traditionally, securities are categorised into three types: equity, debt, and hybrid.

• Equity securities refer to shares (stock) in private or public companies, representing a portion of ownership of the particular company. Shares include ordinary and preference shares.
• A debt security is a type of loan which specifies the principal amount, interest rate, and maturity date of the loan.

Debt securities include, amongst others, bonds (government, corporate, and municipal bonds), and certificates of deposit (CDs), which are certificates issued by banks to customers, offering higher than normal interest rates and requiring a customer to leave a lump-sum deposit untouched for a predetermined period of time.

• A hybrid security is a combination of some of the characteristics of both equity and debt securities.

Examples of hybrid securities are convertible bonds (corporate bonds that can be converted into ordinary shares of the issuing company) and preference shares, also known as preferred stock.

Preference shares have features of both ordinary shares and bonds.

Derivatives – a different type of security

Derivatives are a type of security whose value is based on an underlying asset, or group of assets.

They are financial contracts between two parties, agreeing to buy and sell an underlying asset at a specified price at a predetermined date.

However, the party selling the derivative is not required to own the underlying asset outright. The seller is allowed to pay the buyer with enough money to buy the underlying asset or to offer another derivative that equals the debt owed on the first underlying asset.

Underlying assets comprise bonds, interest rates, currencies, and commodities such as oil and gold. Hence, while commodities are not securities, commodity-based derivatives are classified as securities.

Examples of derivatives are forwards, options, futures contracts, and swaps.

The workings of digital securities

Digital securities can represent any type of traditional asset, for example, equity, debt, hybrids, and derivatives.

The digitization of securities is achieved via a process called ‘tokenization,’ which, according to McAfee is ‘the process of turning a meaningful piece of data, such as an account number, into a random string of characters called a token that has no meaningful value if breached. Tokens serve as a reference to the original data but cannot be used to guess values.’  (Accentuations by the article writer)

The tokenization of securities is made possible thanks to distributed ledger technology (DLT), blockchain technology, and smart contract applications.

What is a distributed ledger?

A distributed ledger is a database that is shared and synchronised across several locations, institutions, or geographies, and accessible by multiple participants.

It is a type of database that enables participants to view all the transactions executed in the database. The participant at each node of the database’s network can access the recordings of the transactions shared across the network and is allowed to own an identical copy of it.

Another feature of a distributed ledger is that any changes and additions recorded in the ledger are quickly reflected and copied to all the participants.

However, records of transactions are only stored in a distributed ledger when all the participants involved have agreed to it.

A distributed ledger contains security measures such as a digital record of the time of occurrence of a transaction, called a timestamp, and a unique cryptographic signature commonly called a digital signature, which validates the integrity and authenticity of an electronic document.

A distributed ledger is a decentralised database, removing the requirement that a central authority or intermediary has to process, validate, or authorise transactions of several types of data exchanges.

Contrarily, centralised ledgers are used by companies and organisations to record transactions in a centralised way. A centralised ledger is more prone to cyber-attacks and fraud because it has a single point of failure.

In summary, distributed ledger technology (DLT) provides a confirmable history of all the information on a specific database, satisfying all the requirements of an audit.

What is blockchain technology?

Blockchain is a type of shared database that captures data in blocks that are then joined together via cryptography. It differs from a typical database, which is a collection of data that can be easily accessed, managed, and updated. In a typical database, the information is stored in tables – a collection of data stored in a series of records.

Although blockchain technology was first defined in 1991 by two researchers, Stuart Haber and W. Scott, it was not until January 2009 with the launch of Bitcoin that blockchain was practically applied. The Bitcoin protocol is built on blockchain technology.

The name blockchain is derived from the blocks that get added to the chain of transaction records.

The object of blockchain is to allow digital data to be recorded and distributed, but not edited. This means that information recorded in blockchain cannot be changed, deleted, or destroyed.

A blockchain transaction process

1. As new data is obtained, a new transaction is entered into a fresh block. Each transaction/document entry is based on a logical relationship to the transactions that have preceded it.
2. The newly entered transaction is then transmitted to a network of peer-to-peer computers spread out across the world.
3. The network of computers then validates and confirms whether the transaction is legitimate.
4. Once confirmed to be legitimate, transactions are clustered together into blocks.
5. Once filled, the block is closed and linked to the previously filled block, forming a chain of data, referred to as a blockchain. Blockchain technology uses cryptographic signatures, called a hash, to join the blocks together.

Security provided by blockchain technology

Blockchains are decentralised, implying that no individual or group has control to alter the data recorded. In fact, all users/participants collectively retain control.

Decentralised blocks are immutable, meaning that the data entered cannot be changed unless a majority of the participants have reached a consensus to do so.

New blocks are always stored linearly and chronologically, added to the last the block of the blockchain.

What are smart contracts?

Digital securities consist of a number of smart contracts, dictating how digital securities can be purchased, sold, and traded in a compliant manner.

Smart contracts comprise, inter alia, the following features:  

• It is a simple program invented to automatically execute once a specified criterion is met, meaning it is a self-executing contract.
• The terms of the agreement between buyer and seller are directly written into lines of code.
• The code and agreements contained in the smart contract are valid and remain valid across a distributed, decentralised blockchain network.
• Smart contracts allow transactions and agreements to be transparent, traceable, and irreversible.
• Smart contracts enable anonymous participants to execute transactions without the need for a central authority, or an externally enforced system.
• They are particularly useful for financial transactions.

Are blockchain and distributed ledger technology (DLT) the same?

People often consider blockchain and distributed ledger technology (DLT) as the same thing, using the terms interchangeably. This is a misconception.

Although sharing various similarities, the two technologies have differences. For instance:

• The key difference is that blockchain is just one type of distributed ledger. Blockchain is a sequence of blocks, distributed ledger is not required to have such a chain.
• In contrast with blockchain, a distributed ledger does not definitely have to structure data in blocks. DLT is merely a database spread across multiple institutions, or participants.
• All blockchains are distributed ledgers, but keep in mind not all distributed ledgers are blockchains. While a blockchain represents a type of distributed ledger, it is also merely a subcategory of them.

Are digital securities the same as Bitcoin and other cryptocurrencies?

Although they all run on blockchain technology, they are not the same.

Bitcoin and other cryptocurrencies are a digital representation of value, only available in electronic form, which makes them a virtual currency, which is a medium of exchange that is created, hold, and transferred electronically.

Contrarily, digital securities are simply a digital representation of an underlying asset’s ownership. Put differently, digital security is the same as a paper document that serves as proof of ownership of a particular security, for instance, a share certificate. However, digital security is in digital form and programmable.

Examples of digital securities

Digital securities are digitized upgrades to traditional securities.

Digital securities can digitally represent any traditional asset, such as equity (shares), bonds, commodities, and real estate. Hence, investing in digital security, an investor is actually investing in an underlying asset.

To date (as of December 2025), we can distinguish four main types of digital securities:

• Equity – digital securities representing ownership in a company is one of the most popular digital securities.

In the article, ‘Why is No One Talking About the Digital Security Explosion?,’ published on the website of The Street, Tal Elyashiv writes as follows: ‘24% of the digital security market is comprised of digital funds/stocks, which are digital forms of funds, stocks, and other traditional financial assets, like SPICE (SPICE VC) and BCAP (Blockchain Capital).’

Elayshiv continues: ‘Platform Equity Digital Securities, which account for 32% of the market, are shares issued during corporate fundraising, like INX (INX LTD), TZROP (tZERO) and EXDT (Exodus), reaching 84.24% market value.’

• Bonds – issuers and investors are showing an increased interest in digital bonds.

For investors, digital bonds also referred to as bond security tokens, provide a fixed income over a specified period of time.

For issuers, digital bonds reduce costs because transactions involve fewer intermediaries.

Furthermore, additional benefits of digital bonds include better traceability, enhanced security, and improved integrity of transactions.

• Commodities – digital securities enable investors to use digital technology to buy commodity-related assets, such as gold and oil futures.

• Real estate – while real estate is not regarded as a security per se, real estate-related assets, such as debt and equity, are considered securities.

Real Estate Digital Securities include real estate as the underlying asset.

Advantages of digital securities

The advantages of having a digitized version of traditional security or asset are straightforward:

• Increased liquidity

Digital securities provide a high degree of interoperability between different markets, enabling end-to-end solutions by combining trading, settlement, and custody services simultaneously.

The increased access to, and easy transfer of digitized securities has the capability to take digital securities to a level of liquidity that would be impossible with traditional securities.

• Increased efficiency and reduced costs

Digital securities are automated which means that maintenance and upkeep of the process require a small percentage of the cost and effort involved in a paper-based and manual process.

In addition, the automated process and regular software updates make digital securities more efficient and accurate.

• Coded compliance

Digital securities can be designed to be compliant with the regulations of a particular financial sector authority.

• Increased accessibility

The reduced transaction costs of digital securities reduce minimum investment amounts, making it possible for more investors to participate on a global scale.

• They are trustless

All transactions involved in the trading of digital securities are recorded on a blockchain, a system considered ‘trustless.’ This means a participant has no need to trust other participants or institutions when trading digital securities. Everyone just trusts the system.