Difference Between Security Tokens and Utility Tokens
Security tokens have recently become more and more actively discussed both among investors and among developers. According to research by Bloomberg, a breakthrough in the number of STOs is due in 2019. Let’s try to figure out what security tokens are and how they differ from utility tokens.
Features of Utility Token
These are tokens with which user gains access to the software utility or service on the blockchain platform. They do not give any benefits, property rights to land, property, or other assets of the company, and also are not analogs or substitutes for loan agreements. A utility token is currently the most common type of coin.
The price during the ICO is determined by the issuer: either arbitrarily or based on the results of economic analysis. After the coins are listed on the exchange, the price changes under the influence of the supply and demand ratio. If the project is in demand among users, the demand for its functionality grows, and the demand for tokens increases the value in the market.
What is Security Token and how It’s Different from Utility Token
A security token is a financial instrument whose primary function is to make a profit by increasing the price of an asset and/or third-party activity. They give holders either a share in profit, payment of dividends, capital of the company, an asset or its share, payments on debt obligations, etc.
At the same time, security tokens are tied to real securities that represent tokenized assets. In different cases, they provide their holder with a number of rights, which are mandatory fixed by a smart contract that manages these tokens.
Unlike the utility token, the value of security token issued during the STO (Security Token Offering) is backed by securities. Thus, they are considered an investment, and the companies issuing them must comply with regulatory requirements. These two principles significantly affect the difference between utility and security tokens. In the event that the project fails or exit scams, utility investors do not receive any compensation, while issuers of the security at the legislative level will be financially liable.
Besides, the distinction between security and utility tokens is the goal of their issue. If coins are issued primarily to raise funds for something, these are securities. It doesn’t matter if it is possible to use tokens to pay for goods and services on the platform. The main thing is what goal does the issuer pursue in the initial issue of coins.
Is STO the Future of Fundraising?
Security Token Offering (STO) is a type of fundraising. The most defining feature of such placements is the name of the process. When ICOs are conducted using cryptocurrencies and IPOs using securities, STO is a combination of the two approaches.
In practice, STO is comparable to ICO in that in the first case, tokens are issued for investors, and in the second, it’s the initial placement of coins. With an ICO, it is planned to make a profit from raising the value of assets, and with an STO, investors benefit from dividends, an influx of finance or gain a voting right tied to security.
Thus, STO is safer for investors because it complies with legal regulations and minimizes the potential for fraud.
Most cryptocurrency exchanges do not place security tokens, not wanting to get involved with regulatory checks. Today, there is only a small number of licensed platforms offering the exchange, but are they secure?
On August 26, ROKKEX — a company created by cybersecurity specialists starts their STO to create a secure and transparent Security Token Exchange to accommodate the transactions with security tokens.
Food for Thought
Following the trends, the number of utility tokens in the market will decrease, and the number of security tokens will only grow. However, the legalization of ICOs by many states can strengthen the faith of investors in it, and shortly utilities and securities, having occupied each of their niches can compete not with each other, but with venture investment.