Utility Token versus Security Token

For the past year, the token ecosystem has been developed on blockchains that have been incorporated into increasingly growing decentralized applications (DApps). The distinction between Utility Tokens and Security Tokens has been one of the most controversial issues surrounding tokens.

The consequences of a token being classified as a utility token or a security token are immense. Regulations apply to security tokens, which can make a project impossible to implement in many instances. Utility tokens are free of regulatory scrutiny, but they come with their own set of risks.

What are the most popular uses for tokens?

So far, the most popular use case for tokens has been fundraising. When a corporation has to raise capital, it sells securities that represent shares of the company to the public. These are subject to oversight and control. The Securities and Exchange Commission (SEC) is in charge of overseeing the public stock markets in the United States.

When cryptocurrency projects seek funding, they typically issue a token that is linked to the proposed project in some way. An initial coin offering (ICO) is used to both issue the token and collect funds (ICO). The tokens distributed in this type of event are usually utility tokens.

The utility of these tokens is derived from their position in a blockchain. The Ethereum blockchain, which is currently the second-largest cryptocurrency network by market cap, is the most common platform for conducting an ICO. Despite a few initiatives being shut down while undertaking an ICO in the United States, ICO events have largely escaped control.

As this form of fundraising has grown in popularity over the last two years, a new type of crypto project fundraising known as a Security Token Offering is now being implemented (STO). Security tokens are distinct from utility tokens in that they are connected to a physical or digital asset.

ICOs and Utility token

Over the past years, the number of initial coin offerings (ICOs) has skyrocketed. ICOs raised over $6.5 billion in 2017 and over $20 billion in 2018. A whitepaper detailing the technical specifics and how the ICO will be structured is typically released by most projects conducting an ICO.

Sometimes, there is text in the small print of the whitepaper stating that the token being issued is a utility token that is not controlled. This means that the team has no financial obligations to investors. This should be carefully considered at all times.

It is not the same as investing in a publicly controlled market when investors participate in an ICO. Institutions that provide a service in a publicly controlled market owe a duty of care to their clients and investors, and failing to do so will result in penalties. Many projects have pulled what is known as a "exit scam," in which the team disappears after the funds have been collected, with no impact for ICO teams who do not support their clients.

The ERC20 smart contract protocol on the Ethereum blockchain has been used to create the most common form of utility token. This is a Fungible Token, which means that each token will be priced the same against USD, Ether, or any other currency, and each token will be identical to any other token. If the token isn't fungible, tokens issued first could be more valuable than tokens issued later.

ERC20 smart contracts have been used by a number of major cryptocurrency ventures to issue tokens during initial coin offerings. EOS, Icon, and Tron are examples of major cryptocurrencies that have completed ICOs using this tool. The ERC20 tokens effectively serve as a stopgap before the projects' mainnets are deployed.

The value of utility tokens is derived from their role within the blockchain system in which they operate. They are basically digital assets that should be carefully configured to handle the rewards of blockchain system users, as well as those that operate the network. They should also serve a key use case and role within the blockchain system under which they are working.

Basic Attention Token is an example of a utility token (BAT). BAT is a cryptocurrency that can be used in the Brave browser, which is a rival to Google and Firefox. Instead of paying companies like Google to publish ads that are targeted at web users, Brave browser and BAT reward the browser user for choosing to display advertisements. With over 4 million users, the Brave browser is one of the most popular projects to include a utility token.

STOs and Security Token

Both physical and digital properties can be tokenized with security tokens. In the sense that investors can earn dividends from owning the tokenized asset, they are more similar to equity instruments. Real-world physical assets could be tokenized to maximize their liquidity. Transferring ownership of a token that indicates land ownership may be much more effective than transferring real property ownership.

Security tokens vary from equity instruments in that they are subject to regulatory scrutiny, which is another feature that makes them close to equity instruments. This makes it more difficult for teams to issue security tokens, but it gives investors more protection. This can, in some cases, limit the number of potential investors.

Only licensed investors in the United States will be eligible to invest in security tokens, which means that the investor must have at least $1 million in net worth or $200 thousand in annual profits.

Tethering of properties is an example of a security token. The value of the token is backed by a tangible asset in the real world, and the token can be exchanged as if it were the physical asset. USD Tether, a cryptocurrency that claims to be backed by USD in a 1:1 ratio, is one of the most prominent examples of this. Others are sold to investors in exchange for money through a security token offering (STO).

Utility Token vs Security Token

Both utility and protection tokens have advantages and disadvantages. Utility tokens, when distributed correctly, can be very useful in a blockchain ecosystem. They are also open to a wide range of potential investors and offer a way for those with even small amounts of cryptocurrency to invest.

Security tokens, on the other hand, are usually more limited, but they pose less risk to the investor. There are also the advantages of regulatory supervision, which ensures that ventures undertaking STOs operate in investors' best interests.

Conclusion

The debate over utility versus protection tokens is currently raging in the cryptocurrency community and among regulators. Some government agencies, such as the Securities and Exchange Commission, have stated their positions more clearly, but most governments have made no official statements on the subject.

Security tokens are becoming increasingly common, and they have a number of advantages over utility tokens. Some projects are being created with the aim of making it easier to create security tokens. Other ventures are considering issuing security tokens, which could help their investors by assuring them that the project is compliant with regulations.