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What is security tokens and utility tokens in cryptocurrency

 
security tokens and utility token in cryptocurrency

One topic I discovered crypto experts are less talking about is security tokens and utility tokens, and that was why I asked a question on Quora with a title – “briefly explain security and utility tokens”. Up till now, I’m yet to receive any answer to that question. However, in this article, I’m rightly taking you through all you need to know about cryptocurrency security and utility tokens.


Cryptocurrency is of two types – coins and tokens. Coins are cryptocurrencies operating independently, while tokens are cryptocurrencies that based their operation on the third party platform - Ethereum smart contract specifically.

Exception of crypto coins, crypto tokens are classified into two and that includes Security tokens and Utility tokens. Both security and utility tokens are ERC-20 compliance tokens upon Ethereum smart contract.

Ethereum is one cryptocurrency with perceived potential to out rank Bitcoin in value in terms of operation based on it smart contract that’s tie to Enterprise Ethereum Alliance (EEA).
A crypto asset a security, a utility - and some argue - a currency.



SECURITY TOKENS

A security is a tradable financial instrument with monetary value, and securities regulations have been a vital part of the American financial landscape for more than 100 years.
Security tokens are crypto tokens that derive its value from external, tradable asset that become subject to federal securities regulations, which failure to abide by regulation could lead to derailing the project.

As articulated most recently in the SEC’s December 2017 “Statement on Cryptocurrencies and Initial Coin Offerings,” a security is:


“an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”


Some argue that all crypto tokens - possibly except for Bitcoin, which did not conduct an ICO - are securities. As a result, venture capitalists and entrepreneurs have been lobbying federal regulators to protect at least some virtual currencies from being categorized as securities, a designation that would carry significantly more oversight.

If a token can be considered a security, the SEC has exemptions that can be utilized for entities issuing securities. If the startup meets its entire regulatory obligation, the security token classification creates the potential for wide variety of applications, the most promising of which is the ability to issue tokens that represent the share of company stock.


UTILITY TOKEN

The defining characteristic of utility tokens is that they are not designed as investment. Starting in 2013, “initial coin offerings,” ICOs, (now often referred to as "token sales" and "crowd sales" to avoid confusion with IPOs and imply the sale of a security) offered an alternative to traditional financing that also doubled as a mechanism for providing people with the currency to participate in a company’s economy.

Crowd token sales have a few dynamics that make them quite different from previous forms of startup fundraising. If properly structured, this feature exempts utility tokens from the law governing securities.

The first is liquidity. Unlike the equity exchanged for venture capital, tokens often trade on various crypto exchanges. This means that if the value of the utility token appreciates, the speculator can sell their utility token and possibly see a return on their "investment."

The second difference is a democratization of who can invest that result directly from the change in liquidity profile.

The third difference is the one most likely to cause challenges for regulators because, tokens are not an ownership stake like stock, but a mechanism for exchanging value within the community of the company that creates the utility token.

The idea is that companies sell utility tokens, in addition to raising capital, they are selling the utility necessary for participation. The challenge is that if there is no product or service to consume, regulators argue that the there is no utility and the crowdsale should be considered a security token.


Difference between security tokens and Utility tokens



Security tokens — tokens that represent ownership in assets.
Utility tokens — tokens without equity or provided rights associated with a security.
Security tokens — designed to be the company’s share.
Utility tokens — represent future access to company’s product or service.
Security tokens — part of regulation and security law (regulated offering – KYC).
Utility tokens — exempted from regulation and security laws (unregulated crowdsales).
Security tokens — investors expecting profits.
Utility tokens — purchaser.
Security tokens — asset tokens.
Utility tokens — user tokens.


Summarily, security token and utility tokens just have different aims. Security tokens are designed to be the company’s share, while utility tokens represent access to company’s product or service, i.e. have practical use. Utility tokens are exempted from regulation and security laws.

Security token is a next big thing in ERC20 token from Ethereum as far as I know, and most ICO’s may, and be willing to be created with this new standard in the near future.

There are massive returns to be had in the utility token world. But we believe that there’s something bigger going on in the crypto space; something that not too many people are talking about.

Most financial experts on Wall Street agree that the next big trend in cryptocurrency will be security tokens — tokens that represent ownership in assets.

Today, the security token market is only worth $100 million, while utility tokens are worth upwards of $700 billion. But, if you consider all the assets out there that can be tokenized like venture capital LP shares, real estate units, or shares of companies, it is pretty easy to see how the potential of security tokens is FAR greater than the market cap they currently represent.

My prediction is that by 2020, security tokens will be at a $10 trillion market cap. They will dominate the blockchain world, and disrupt Wall Street in the process.

By issuing security tokens, companies can provide regulated offerings of asset ownership in a seamless way. But the process of issuing tokens is still really, really hard. There isn’t an efficient way to do it. The KYC (Know Your Customer) process is costly, and takes a lot of time.

There are technological problems related to smart contracts and building on Ethereum. And the complex web of global regulatory requirements is intimidating. However, tackling this $10 trillion security token problem and allowing assets to migrate safely to the blockchain is better.

3 comments:

  1. Nice, glad you found value. Keep reading and subscribe to my mailing list. Cheer

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  2. Recently, Bitcoin may have taken a dip to give spotlight to other cryptocurrencies. But this does not signal any crash of the cryptocurrency itself. ICO Explainer Video

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