Security vs Utility: Similar but still quite different
Consumer interest for cryptocurrency has surged in recent years, while the blockchain bubble has ushered in a new era. You only need look back a couple of years to 2017, with digital tokens accruing in excess of 5 billion US dollars for various cryptographic currencies. It was certainly a busy year for the sector, but it also saw an increased weariness of states and governments on the part of distributors.
Agencies like the U.S. Securities and Exchange Commission are making it increasingly difficult for token offerings to be carried out with the same freedoms enjoyed only a few years ago. It’s no surprise that those behind these token offerings have tweaked the truth a little to overcome hurdles imposed by the SEC and other agencies. One of the simplest methods of manoeuvring around any obstacles has been to define security tokens as something else entirely. Incorrectly referring to them as utility tokens is a common misdirection tactic.
Before we delve deeper, it’s worth refreshing on the differences between security tokens and utility tokens. Let’s start with a look at utility tokens. You might have seen these referred to as ‘user tokens’, or perhaps ‘app tokens’ in the past. In most cases, utility tokens are utilised in the development stages of projects by companies in an effort to fund their endeavours. When it comes to determining value, the utility token itself is held up against the possible future value of the concept behind the offering. More specific characteristics of utility tokens include much more involved platforms, tailored to the individual token type itself. The more activity occurs from participants within said ecosystems, the higher the overall value of the utility token. You can also consider these types of tokens as two distinct subtypes, which we’ll now explore in a little more detail.
The main aim of these utility tokens is to drum up engagement with users. Beneficial relationships and activity between the token holder and company behind the tokens is maintained as a result. Token holders who develop positive reputations over the network at the core of the token can look forward to potential perks like additional tokens. There’s also more conventional reward schemes on offer, with loyalty points a popular option. Once enough points have been pocketed, lucky token holders can use them to access exclusive services and newly released products. There’s also the possibility of lucrative deals and discounts on purchases.
This type of utility token is best contextualised by thinking about token generation stages. They are traditionally provided to users to be used with a specific service or product, with a general sense of pre-order mentality around them. After a project has been finished and goals achieved, those who holders can then use their tokens to splash out on purchases of the newly unveiled service or new product in question. In the web and mobile sector, these tokens have been used successfully with the lure of dishing out discounts to users for early-stage participation.
Utility tokens are easily understand to those delving into cryptocurrency, but the general sense of simplicity doesn’t steal away from a few drawbacks.
For one, consumers can’t enjoy the peace of mind that regulation might bring to the table. Utility tokens are outside of the jurisdiction of state and federal law. What’s more, agencies like the SEC with these type of tokens in their sights, have yet to provide anything close to useful guidance on the topic. There’s always the risk of fraud and cyber-attacks to consider with utility tokens, while unpredictable price behaviour is another potential problem.
Need some good news? As utility tokens are offered with a fixed overall number of tokens issued, holders can look forward to an assurance of value increases should there be sufficient demand for services and products related to the token. It’s pretty straightforward to trade utility tokens as well, with exchanges ensuring it’s a user-friendly endeavour. More project and company-specific perks include the benefits of a user being able to enjoy exclusive or advanced access to services and products. Those who engage early enough can also expect a higher chance of benefiting from participation in project development, with many platforms offering certain holders an active voice when it comes to voting on decisions.
Unlike utility tokens with their prospective products and potential rewards, security tokens operate differently. The key difference here is that there’s an actual asset that’s being represented by the token itself, whether that be company shares, equity and so on. Security tokens have been successfully utilised for some time now, with the token type integrated into more conventional IPOs thanks to the rise of the blockchain. Federal regulation also applies to security tokens, explaining why there’s been a sharp rise in security tokens being given the utility token title to steer clear of regulatory bodies.
There’s multiple uses for security tokens. They can be used to share out profits between individuals, settle interest rates or be used as an investment tool to speculate on further security token offers and various assets. The end result here is a boost to profits for anyone in possession of the security token in question. In short, security tokens bear all the signatures of a genuine financial instrument with trading potential. It’s something that holds very real fiscal value. Things get a little more complicated when you consider the two distinct subsets of security tokens the equity: token and the asset token.
Quite simply, these types of security to ken are tied into an actual asset in the real world. Assets could include precious metals and gold, property and more. The unique advantage of using asset tokens to invest in these rather traditional investment products is that individuals can use asset coins to invest in only a minor percentage of the overall asset, rather than outright investment. This makes investing a much more accessible enterprise.
Equity tokens are arguably the standard when it comes to security tokens. This type of token denotes asset ownership. Ordinarily, these kind of security tokens let a startup amass necessary funds with token generation events. This is in lieu of a conventional initial public offering. What’s so appealing about this switch in strategy is that the everyday investor can participate with the financial markets with relative ease and fewer barriers.
There’s plenty to be pleased about when it comes to asset and equity security tokens. As long as they are compliant with law bodies and regulations, those in charge can enjoy considerably lower running costs than if they were operating a traditional IPO. Compliance assurance also provides individuals with peace of mind, with minimised risks on their investment. What’s more asset security tokens provide a handy access point for those fairly new to the blockchain revolution, but who have some familiarity with financial investments. Those with little investment sector knowledge can also take advantage of the lower overall entry points partial asset investment offers.
The downside of security tokens? There’s also a risk that those behind the tokens aren’t actually falling in line when it comes to regulation. If there’s any shortcomings in this area, the potential for project implosion is always a worry. Enhanced regulation also means that restrictions on trading are enforced, while there’s also a diminished level of marketing activity as the market is largely one made up of investors with certification.
Are security tokens here to stay? All signs point to yes. For many, these tokens are the most user-friendly option, with higher levels of safety and lower levels of risk. On the other side of the fence, the overall efficiency and cost-effectiveness of security tokens removes the costly considerations of initial coin offerings.
The buyer can also benefit from a plethora of resources and references to ensure high levels of confidence when carrying out security token transactions. As security tokens are registered with the likes of the SEC, there’s a high volume of material available to the public that covers everything from basic buyer rights to advice on consumer protection, not to mention useful insights into what kind of returns a buyer can expect. This increasing level of transparency is terrific to see. Finally, the higher liquidity levels of security tokens ensures international trade is unrestricted, meaning projects can extend their outreach beyond borders and bring together much larger investment pools.
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