Security Token Vs. Utility Token

With the advent of Blockchain technology, financial markets have transformed the way they operate. ICOs play a major role in it.

ICOs refer to Initial coin offerings, are revolutionizing business worldwide by Ethereum which is an open-source, public blockchain platform.

They have raised a combined of over USD 4 billion so far. Experts believe that this number will raise in the future.

So What Does An ICO Mean?

It is crowdfunding that allows businesses ignore early seed investment. Firms, with the help of ICOs, raise capital from different sources by offering digital tokens or coins to users as an alternative to ownership shares.

Today, ICOs are being offered in a huge number. Usually, many of them drive good opportunities, but a small number leads to big problems.

Buyers become sceptical when it comes to buying ICOs as many of them are scams . Moreover, the utility tokens they offer, are securities in real. Therefore, they breach the security law in the U.S.

According to a report of the Securities and Exchange Commission in July 2017, certain tokens are considered as securities; therefore, they would be subjected to regulation.

This crackdown clears that security tokens are likely to become the next crypto trendsetter in the future. ICOs were not intended to be securities,said SEC chairman Jay Clayton.  But now, if a company issues any crypto-asset that increases in value over time on the basis of the performance of the company, then it is liable to be considered a security. You may call it a coin, but if it works as security, would be considered security.

What Is A Security Token?

A security token is a negotiable, fungible financial instrument that carries monetary value, for example, stock in a company like Apple. Being digitized securities, they symbolize shares in a financial asset. Similar to other cryptocurrencies, these coins are capable of trading across the world.

The most widely used security tokens are ST-20 tokens with Ethereum’s blockchain and Polymath’s platform as their base. For being a tokenized security, it has to meet and follow certain rules and standards to be concluded as an ST-20 token.

Let’s dig deep by taking an example of the Polymath platform that ensures tokens run on it meet all legal standards.

Customers get instant access to tokens as soon as polymath launches them. You can pay in a few currencies, such as Bitcoin or Ethereum, but there is a discount, or you can grab discounts using other payment gateways. Generally, people hold Polymath services as the growing demand for tokens incentivize them.

What Is A Utility Token?

Utility tokens are important in cases where security tokens are being considered dangerous by security regulators. A utility token is nothing but access to the product or service of the company. Actually, they are not designed to be used as an investment which frees them from the security policies of federal laws. A successful example of utility token is Civic that has created one billion utility tokens. In this decentralized token landscape, you can acquire identity verification-related services through Civic. It accounts for a unit of the network. When the number of transactions grows, the network also grows, and the demand for the tokens increases.

Considering the underutilization of utility tokens, a report claims that out of 226 ICOs, only 20 are used in operating networks. Another example is Storj, a company that uses utility token, allowing people to use space on the network. The company is able to raise half a million dollars through the token crowdsale. According to the CFO of Stroj,“For many companies, utility appears to be an afterthought, but for a token to be successfully adopted into the community, it is the most critical component. With the number of tokens on the market today, and new ones being launched every day, it’s clear there is a bubble, though the size of it might be debatable. When the market slows, the tokens that have no utility will ultimately not have any value at all.”

Furthermore, utility tokens are similar to coupons for companies using them. For example, retailers who accept pre-orders after they get token money for the games that are about to be released. In this way, a token differs from the ICO token that might not be a good fit for every company. Today, utility tokens are replacing security tokens, for example, Filecoin has raised about $52 million by following the actual purpose of the blockchain solution.

Final Words

I hope this post has cleared the differences between security tokens vs utility tokens. It is a war between security and utility. But we need to pay more attention to utility rather than security to get the most of blockchain technology.

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