Utility Tokens and Security Tokens
As of now, Ethereum is the most used and most trusted platform for external token projects. However, other platforms are also getting traction. Most tokens run on an already existing blockchain which is quite unlike cryptocurrencies, which create their blockchain.
At present, the Ethereum blockchain is the most popular blockchain for the utilisation of ERC20 tokens.
Smart contracts are used for gathering the existing tokens and for issuing new ones as well.
People primarily use tokens to pay for services, as digital assets or as voting rights in ecosystems. In most countries, their regulatory status is still quite a debatable topic.
Most of the existing cryptocurrencies use their blockchains. Some tokens are considered separate projects that use the functionality of an underlying blockchain to start their development.
A security token is based on blockchain technology and is also called an equity token or investment token. It shouldn’t be confused with the security token needed to access a sensitive network system like a bank account. A security token is a cryptographic token tied to a securities offering in the blockchain technology world.
It denotes a share in the company that issues the token rather than providing a tangible benefit for an investor, like accessing an ecosystem. Investors purchasing these tokens wish to get a profit from this investment. Security tokens use blockchain technology’s efficiency and speed and benefit from government regulatory measures which increase fraud protection.
The Securities and Exchange Commission (SEC) in the USA regulates how security is classified. The SEC also specifies how companies need to disclose their securities offerings. The US Supreme Court instituted the Howey Test in 1946. It is a methodology used to determine if putting money into a business means you have “invested” in it. Security becomes an asset when a person invests money in a joint enterprise and anticipates profits exclusively from the promoter’s or a third party‘s efforts.
On the other hand, Utility tokens serve a specific purpose. They may range from receiving preferential treatment to services or on a platform to redeem a particular service. These constitute most of the tokens issued within the scope of ICOs. Companies mostly use them to establish interest for their products and value creation and application in services provided in blockchain ecosystems.
If they buy utility tokens, investors don’t get an actual share in the financial ownership of a company. In contrast to security tokens, utility tokens are not for investment.
Yet, there is a prevalent misunderstanding that if the number of people using a utility token rises, the token’s value grows as well. A utility token’s investment value correlates with the actual demand for the utility token. Investors can expect the token value to rise in line with the increasing demand when a cap on its availability. When the token gets tied to DApp, the scaling up of the network could increase its value.
Almost all over the world, open banking is still in the early stages of development. We can expect security and utility tokens based on blockchain technology to play a significant role in digitising capital markets. But, there is not much consensus on the regulation of cryptographic tokens of any kind.
Regulatory agents in various countries currently take divergent approaches to classify tokens and cryptocurrencies due to due diligence requirements. All over the world, supervisory authorities are working towards coordination and clarification on a global level continue to be the most crucial part in assuring continued innovation and growth in the fintech industry.
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