With the growing popularity of cryptocurrency and ICOs, many people are curious both about what these new currencies can do for them and how to differentiate them from tokens and token securities.
These are digital currencies such as Bitcoin, Litecoin, and Ethereum which are built on top of the blockchain. They exist independently of a centralized bank or treasury. There is the potential for all kinds of fiat currency to become cryptocurrency, but when backed by a government there would likely be a central banking authority unlike other coins.
A utility token is either a service or unit of services that one can purchase. You can compare these tokens to API keys that unlock these services. Using utility tokens is a means of funding projects which couldn’t be funded prior to users buying them. In other words, an ecosystem requires funding to be built and so a company makes it possible for their tokens to be mined and sold in a crowdsale during a token launch. This gives anyone who has bought these utility tokens both a preview of the ecosystem but a headstart on acquiring these tokens before anyone else.
Following the SEC’s decision that any token (representative share of a business) which cannot pass the Howey test must be considered a security and therefore falls under the SEcurity Exchange Act, you need to address the following when evaluating tokens.
Howey test:
It is this third point that ultimately determines whether a token is a security — if profits from an investment are mostly or completely outside the control of the investor, then the investment may be a security.
This often causes in confusion, and so it it’s important to consult a broker or other expert to determine the status of any tokens. Of note, utility tokens issued by startups to finance a user’s future purchases are usually not securities because the intended purpose is to facilitate a purchase. But again, if you’re unsure of whether you’re dealing with coins, tokens or tokenized securities, you should always seek the advice of an expert so that you fully understand what the best purchase is for you.
