How Do Utility And Security Tokens Work?

Without a doubt in today’s world, utility and security tokens are now worth millions of dollars across the globe. Other significant technologies also have come to transition the world from the traditional ways to the decentralized era, where visibility and accessibility are guaranteed.

Technology like the blockchain has caused disruptions in some major industries that are trying to adapt the technology to their business models. However, what then do terminologies as the tokens mean? What differences does the security and utility token have?

What Does Q Token Mean?

First, to grasp the concepts of utility and security tokens, it is best to understand what token is. A Token is defined as an asset or a utility issued by a company at the initial launching of a coin offering (ICO). While the IPO offers buyers stocks in exchange for their investments, the initial coin offering (ICO) gets a token in exchange for their investment.

However, there is this misconception when differentiating between security tokens and utility tokens. For those with little knowledge about tokens, they are not complex to understand. Nevertheless, at the initiation of coin offerings, there are two primary types of tokens, the security and utility tokens.

What are Utility Tokens? 

Simplistically, whenever the tale of utility tokens is heard, they are just application coins or tokens of users. For clarity, a utility token is given to users of products or services offered by the producers. Utility tokens are not made to be investments but just access to further products or services provided to the users. 

Due to most initial coin offerings (ICOs) being basically investment opportunities in the company, most qualify as securities. However, for those that do not qualify as investments, they are thus categorized as utility tokens. They can be regarded as passage tokens that grant access to other offerings from the company.

Utility tokens give holders the right to use the network and given the freedom to take advantage of the system through the means of voting. A typical utility token is the Ethereum ERC20 standard. The ERC20 standard is used by companies in building tokens for the launching of their ICOs. Other examples of the utility tokens are, Siacoin and Filecoin.

What are Security Tokens?

While the utility token is seen as the “passage token” that gives access to other services or products that the company has to offer, the security token is an asset in a digital form that is linked to an external asset. The external assets related to the digital asset can be traded through the laws that guide the transactions of securities. Also, noncompliance with the laid rules of the securities can lead to severe penalties or a halt on the development of the projects.

A peculiar feature which makes the security tokens more liked by some is the ability of these tokens being a digital form of representations of the company’s stock. These digital stocks, as explained, are guided by the Securities agency that is backed up by law. The Securities Commission, for instance, sees to the issuance of Overstock’s tZERO which hold the coin offerings for funding of the trading platform.

Utility Versus Security Tokens

What distinguishes the security and utility tokens is the functions of the tokens when compared. It depicts that the security tokens are created for investment purposes while the utility tokens exist as pathways for other services or products.

While holders in the security tokens get ownership of the company through the system of voting offered on a platform by the blockchain, this gives room for investors to control the fate of the company in their daily operations. On the other hand, the utility tokens exist not to grant control to holders but to interact with the company’s services or products.

Regardless, both securities have the potential of value once the price of the tokens increases in the market. When looking at the costs of coins on the coin market price list, it seems complicated in knowing which is a utility or security token, thus the Howey test—which helps to classify.

Final Thoughts

The significant differences between the utility and security tokens have been explained. While the utility token is created for reasons of access to the company’s services or products, the security tokens are created for investments purposes. However, the sales, price, and everything each token encompasses is regulated according to the laws. But, due to the nature of the security tokens, it is regulated by the securities commission in charge.