101 | DLT Academy | Digital Securities

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1. Introduction: Why This Matters

Digital securities commonly referred to as security tokens are regulated financial instruments issued and recorded on blockchain or distributed ledger infrastructure. These instruments retain the legal form of traditional securities such as shares, bonds and fund units, but benefit from automation, on-chain compliance and real-time settlement.

Understanding how digital securities differ from cryptocurrencies or utility tokens is essential for any institution involved in tokenization. For legal teams, product structurers, compliance officers and fund managers, these distinctions define how assets must be issued, traded and reported.

This module introduces core classification principles, legal frameworks and the infrastructure needed to support institutional-grade digital securities.

2. Key Concepts & Deep Dive

A. What is a Digital Security?

A digital security is a legally recognized financial instrument such as equity, debt, or a fund share that is:

• Issued through a smart contract or digital registry
• Recorded immutably on a blockchain or DLT
• Transferable among eligible participants
• Bound by enforceable legal rights and investor obligations

In Switzerland, digital securities are defined under Article 973d of the Swiss Code of Obligations (CO) as uncertificated register securities. They carry full legal enforceability and are recognized as book-entry instruments.

In the European Union, digital securities are regulated under MiFID II and the forthcoming Markets in Crypto-Assets Regulation (MiCA), provided they meet the criteria for financial instruments.

While blockchain technology supports issuance and transfer, it does not change the legal nature of the instrument. What matters is the asset’s structure and the rights it confer not the system that records it.

B. Security Tokens vs. Cryptocurrencies vs. Utility Tokens

Security tokens are structured within regulatory frameworks. Cryptocurrencies and utility tokens operate under separate or lighter legal regimes and typically lack contractual rights enforceable under securities law.

C. Asset Classification in Tokenized Finance

Digital securities are generally categorized into three major types:

Equity Tokens
Represent ownership in a corporate entity or SPV. Typically include voting rights, dividend entitlements and liquidation preference. Must comply with company and securities law in the jurisdiction of issuance.

Debt Tokens
Represent fixed-income instruments such as bonds or loan notes. Holders receive defined interest and principal repayment over time. Smart contracts may automate coupon payments, but legal enforceability must remain in place.

Fund or Revenue Tokens
Structured as participations in collective investment vehicles or infrastructure-backed revenue flows. Examples include profit-sharing tokens linked to specific assets or fund returns, like those developed by GX Securities.

Token classification is determined by legal structure and economic function not by the blockchain used. Regulatory compliance applies regardless of technical execution.

D. ISINs and Digital Securities

The International Securities Identification Number (ISIN) is the global identifier for securities used in capital markets. Tokenized securities may be assigned ISINs if:

• They are legally classified as financial instruments under national law
• They are structured for institutional distribution and custody
• The issuance meets reporting and settlement requirements for tradable assets

ISIN eligibility allows security tokens to integrate with legacy trading, custody and portfolio management systems. It bridges DLT-based instruments with traditional financial market infrastructure.

3. Real-World Application

Case Example: GXFlex (GXF) Token

• Asset Type: Revenue-sharing token linked to GPU data center operations
• Legal Structure: Swiss digital security under Article 973d CO
• Blockchain: Issued on the XRP Ledger (XRPL)
• Investor Rights: Contractual entitlement to 80 percent of net profits
• Compliance: Smart contract-based distribution logic with AML onboarding and institutional wallet integration
• Custody Model: Designed for regulated wallet providers, with support for whitelisting and clawback features

GXFlex demonstrates how a token can be structured for institutional use while remaining fully aligned with Swiss securities law and leveraging XRPL for operational efficiency.

4. Summary: Key Takeaways

• Digital securities are regulated instruments issued and managed using blockchain infrastructure.
• They are legally equivalent to traditional securities and must comply with national and cross-border regulations.
• Security tokens differ fundamentally from cryptocurrencies and utility tokens in their rights, obligations and legal frameworks.
• Classification depends on legal substance and investor rights, not technology.
• Jurisdictions such as Switzerland, Liechtenstein, Germany and the EU have created compliant frameworks for tokenized securities.

5. Next Steps & Related Modules

To continue building your foundation in institutional tokenization, proceed to the following modules:

• Next Module in Faculty 1:
  Module 1.2 – Institutional Tokenization Lifecycle
  Explore the full issuance-to-redemption cycle and how tokens are structured, distributed and managed.
• Recommended Follow-Up in Faculty 2: XRPL Academy
  Module 2.2 – Tokenization on XRPL (XRP.IOU vs XLS-20)
  Learn how XRPL supports the creation of compliant security tokens, including issuance logic, trustlines and transaction security.
• Supplementary Resource
  Token Classification Cheat Sheet (PDF) – Downloadable reference guide outlining regulatory distinctions between digital asset types.

Key Learning Links

• Swiss Code of Obligations (Art. 973d):
  https://www.fedlex.admin.ch
• EU MiCA Regulation:
  https://eur-lex.europa.eu
• FINMA Guidance on DLT Securities (2021):
  https://www.finma.ch
• XRPL for Institutions (XRPL Foundation):
  https://xrpl.org
• GX Securities Prospectus Overview (internal academy reference)
  
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Discover how GX Securities leverages the XRP Ledger for compliant DeFi infrastructure and tokenized asset operations on XRPL | Contact us at compliance@gxsecurities.com or send us an inquiry

‍Disclaimer
GX Securities operates solely as a DLT infrastructure provider and this article does not constitute financial advice or an offer of securities.

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