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Utility Tokens vs. Security Tokens

Utility Tokens vs. Security Tokens
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The cryptocurrency world has continued to see a sustained rise in the value of capital. This year, over $3 billion have been raised via different ICOs. The industry is thus growing and it is projected to continue growing over the next couple of years. Startups that want to raise fund have continued to issue ICOs with much success. Analysts figures show positive results for the next decade too as crypto tokens are set to define the financial landscape.

Tokens have been forecast to be at the core of the cryptocurrency industry as innovation continues to grow. Not only will tokens be transferred across networks but they will also have a broader range of functions. It is the functions that are assigned to cryptocurrency tokens which determine what kind of class the token is in. As of now, the most important classifications of tokens are security tokens and utility tokens.

Utility Tokens

These tokens are also known as user tokens. The basic function of the tokens is to act as a store of value for a company’s commodities. This is why they are also known as app coins. Since the tokens do not fall into the category of investment, they are exempted from various laws and regulations. Utility tokens are often used by startups to sell commodities which are either in the market or in development.

There are already various companies that have sold such tokens during fundraising drives. Once a token is sold to the user, the transaction acts as an authorization to access specified services by the buyer. Initial public offerings (ICOs) are much more subject to scrutiny that token sales. Crowdsales that are meant to raise funds for startups are thus often referred to as token generation events (TGEs). Such events are characterized by the sale of utility tokens and not securities.

Security Tokens

Security tokens, on the other hand, are actual tradeable tokens that represent particular assets. The tokens are thus subject to regulation and there are penalties involved where the law is broken. Many startups that choose to adopt security tokens as a means of raising funds are usually subject to many regulations. The advantage of these tokens though is that they are seen as actual assets and the buyers thus know they are investing in actual company shares.

Security tokens are still being adopted by various entities across the industry. There is still a lot of innovation going on and the full potential of the tokens will be seen in future. Since regulations are also being updated regularly, the full scope of the regulatory regimes is not yet developed. Recently, Overstock announced that it is in the process of establishing a security token trading platform through tZERO, one of its companies. The tokens that will be issued by the company will be subject to various laws and the regulation of the crypto securities will almost be the same as that of traditional securities.

The hope and vision for most entities in the crypto world is to see a fully digital industry where mainstream companies get into the game and start issuing their share sales through ICOs.