The Pre-2018 Story
In 2017, Security tokens made up $100 million (roughly 1%) of the total cryptocurrency market cap while utility tokens made up $700 billion.
Utility tokens were easier to launch, and market, than security tokens because they are not regulated. This means that the ICO company can pursue non-accredited investors and retail investors.
They're not considered a security by regulators because they're products, not assets. By creating utility tokens, a startup can sell “digital coupons” for the service it is developing, much as electronics retailers accept pre-orders for video games that might not be released for several months.
Filecoin, for instance, raised $257 million by selling tokens that will provide users with access to its decentralized cloud storage platform.
Security Tokens, like all other securities, are regulated by regulatory bodies like the SEC (USA) and SEBI (India). Security tokens represent an underlying asset. These are tokenized funds, tokenized real estate, tokenized commodities.
Failure to abide by these regulations could result in costly penalties and could threaten to derail a project.
Every major cryptocurrency exchange made it clear that they would not list any token deemed to be a security token.
Many ICOs jumped through hoops, overturned their business models, just to ensure that their offerings were a utility token. The token utility they describe is weak at best and fraudulent at worst.
This was also a reason why 50% of the ICOs launched have failed.
To be fair, utility tokens acted as the bridge that helped people get accustomed to the crypto-space.
2018 and Beyond
Now that the bridge has been crossed, we can start talking about Security Tokens and keep the ball rolling. Let's start calling a spade, a spade.
The security token classification creates the potential for a wide variety of applications, the most promising of which is the ability to issue tokens that represent shares of company stock.
According to Bloomberg, the global market is roughly around $80 trillion. Now imagine having even 25% of that stock issued by companies and institutions as a security token. That would put the security token industry at $20 trillion on a global scale.
Praetorian Group Files To Be First ICO To Sell Registered Security Tokens In US
There are also several security token exchange platforms launching within the next six months.
Why should I create a Security token if creating a Utility token is easier and inexpensive?
Allow SEC Chairman Jay Clayton make that argument - “They are offerings of interest in an enterprise where the buyer…is basically saying I’m investing with you with the promise of a future return, whether you deliver something to me in the future as a result of your efforts or because I sell it to somebody else who wants that return in the future. That’s a security, and the SEC’s job is to regulate the offer and sale of securities.”
Technical and technological distinctions between tokens generally are not relevant to the question of whether a token is a security.
A token does not stop being a security when the related platform becomes "operational."
For those token issuers that still want to argue that their tokens are not securities, you may want to ask yourself this: if the SEC thinks that each of the hundreds or thousands of tokens it has seen are securities, what are the fundamental differences between your token and all those others that make your token the only one that is not a security
