Hello, the beautiful people of the Hive universe. Hope you all are doing great and enjoying your life every day. If are a crypto enthusiast, then you must hear the term commodity crypto, which is security and utility tokens. Even I was a little bit confused for the long term and it is not so easy to get the whole idea as the logic and the current use cases are so complicated for most crypto to differentiate! So, I wanted to learn and I think everyone must learn the basics. So, this post will be based on the knowledge that I obtained on these terms we often hear in the crypto space.
There’s been a big debate going on in the crypto markets about how to classify crypto assets and how to validate these tokens and coins for assigning the proper regulatory body that it falls under. Are crypto assets securities that are usually governed by the SEC or are they commodities and therefore regulated by the CFTC? The differentiation has started spreading as a hot topic in the bull cycles of 2017 and many groups started to declare the idea of a utility token and distinguish that from a security token to attract the more interested people to think about it.
In general, we know that commodities are unindustrialized raw materials that will be used as inputs in production for getting other goods or services. These commodities can be traded in the market for further processing. Also, these commodities have a future market where investors can also impact the prices of commodities via futures contracts or derivatives tied to the direction of price in the future.
The most popular commodities that are being traded are oil, natural gas, gold, silver, rice, wheat, coffee, cotton, and sugar. Prices of these commodities are volatile and trading them is not an easy task due to the trade of large quantities of goods and so professional investors tend to dominate these markets worldwide.
Generally, the commodity market is more flexible without any strict regulation but securities such as bonds, and stocks are subject to very complicated and strict rules on price transparency which is under constant observation by the government agencies. In that sense, the cryptocurrencies are more likely to the commodity. Also, many cryptocurrencies are being used as a medium of storing value or a tool for price speculation which brings it closer to a commodity like gold which has historically been used as the main medium of storing value.
However, cryptocurrencies could be considered as security when they get the opportunity of having an open market for a lot of investors after passing thousands of regulatory hurdles. This happens because investors love to have greater access to publicly traded securities such as stocks or ETFs and in that case, Bitcoin ETFs are considered as securities. In some other cases, cryptocurrencies can be like securities when they’re issuing some IPO (initial coin offering), the same as stocks.
Whether the cryptocurrencies are Securities or commodities, both of them are traded on markets. They have great liquidity which offers easily exchanged options. The same strategy of an investor buying stock hoping for its value to rise and making a profit is applicable to cryptocurrencies also. Both situations for these cryptocurrencies provide an opportunity for making a profit with some underlying risks and so financial planners often diversify their portfolios by including commodities and securities both.
The most used tool for the basic framework used to figure out whether a token is a security or not is called the Howey Test which is referred to a court case between the SEC v. W.J. Howey Co of 1946. The test is used to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act: "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."- SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
For clear understanding, there are 3 questions:
Is an investment of money with the expectation of future profits?
Is the investment of money in a common enterprise?
Do any profits come from the efforts of a promoter or third party?
If the answer to these questions is “yes,” then the asset is considered a security.
The term "Securities" is a concept that produces a return to a common central enterprise. The main focus of the law is to capture an agreement among the entities, for example, “I’ll give you some money for a percentage of the potential profit the enterprise generates.” So, in simple words, there will be a fixed profit for holding the crypto as a dividend is the key point for the securities.
But the bitter truth is most crypto utility tokens are not the same. Crypto tokens are not generating a return that is then divided by the owners via dividends or share repurchase. Though some tokens do send a part of the returns generated from fees for the blockchain transactions. Most expectations of future gains are generated by the scarcity of supply and demand mechanism of the traditional market scenario.
Security tokens are digital tokens that represent ownership of a real-world asset or investment. These assets can include equity in a company, bonds, real estate, or even art. Security tokens differ from traditional securities in that they are digitized and recorded on a blockchain, which provides increased transparency, security, and fungibility. The U.S. Securities and Exchange Commission (SEC), which regulates securities markets in the United States, has provided guidance on the definition of security tokens, stating that they must meet the criteria of an "investment contract" as defined by the Supreme Court's Howey Test.
Examples of security tokens include tZero, Harbor, and Polymath, all of which offer platforms for issuing and trading security tokens.
Utility tokens are digital tokens that provide access to a specific product or service within a blockchain network. They are not considered securities or commodities because they do not represent ownership in a real-world asset or investment. They have no value from all perspective and their value only depend on the use cases and the demand and scarcity. Instead, they are used to enable specific functions within a blockchain ecosystem, such as facilitating transactions or accessing features of a decentralized application (dApp).
The value of utility tokens is tied to their usefulness within a particular blockchain ecosystem. For example, the Ethereum blockchain uses Ether (ETH) as its native cryptocurrency, which is used to pay transaction fees and other fees associated with deploying and executing smart contracts on the platform. Other examples of utility tokens include Basic Attention Token (BAT), which is used to reward users for viewing ads in the Brave browser, and Golem (GNT), which is used to pay for computing resources on the Golem network.
Sources:
SoFi:https://www.sofi.com/blog/crypto-commodity-vs-security/
Medium: https://medium.com/hackernoon/crypto-classification-security-vs-commodity-decf2d78c4a1
For more details on these topics, you can browse these blogs if you want to learn more deeply.
Investopedia: https://www.investopedia.com/terms/u/utility-token.asp
Blockchain Council: https://www.blockchain-council.org/blockchain/utility-tokens/
Investopedia: https://www.investopedia.com/terms/s/security-token-offering-sto.asp
SEC.gov: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
Blockchain Council: https://www.blockchain-council.org/blockchain/security-tokens/
The Block: https://www.theblockcrypto.com/what-are-security-tokens
Coindesk: https://www.coindesk.com/what-are-security-tokens-a-comprehensive-guide-to-stos
I hope you like my blog about the basic knowledge of security, commodity, and utility of cryptocurrencies and I am inviting you to get the experience in my upcoming blogs. And if you have any kinds of queries, you can ask me in the comments. I will try to answer at my level best.
Thanks a lot for your time and attention, I will catch you at the next one.
Have a great day!
