The Cryptocurrency boom has elevated the importance of ICOs and the capital across the World. This has given rise to new digital assets solely created for daily use as an alternative to fiat currencies. Techies and geeks initially used these digitized currencies and, are now slowly entering the mainstream market. However, there has been a lack of interest from institutional investors due to non-compliance with SEC and FINRA regulations. SEC & FINRA have started to crack down on shit coins and scams. However, this has given a clear demarcation of Utility Coins and Security Tokens.

Utility Coins

These tokens can be used “utility tokens” as they can give access to a specific service or platform. Since the overall supply is limited, these utility tokens may get appreciated over time, when the demand for the product or service increases. It should be noted that utility tokens are predominantly an organization distinction and not a legal one. Participation in security token offerings is similar to ICOs. Interested individuals can purchase the tokens during the offerings so that it can be used for trading and selling.

Security Tokens vs Equity Tokens

In simple, security tokens are common stock on the blockchain. These tokens are similar to the company shares held by the investors and companies usually issue voting rights through a blockchain platform. The tokens are liquidated to create an Equity Tokens. In other words, these tokens contribute an investment contract, where the Investors typically purchase in anticipation of future profits in the form of dividends, equal sharing of revenue generated and the normal appreciation process.

Security tokens bridge the gap between the traditional financial sector and the blockchain framework; it’s one of the reasons banks have initiated the integrated Blockchain frameworks in their system. Issuing security tokens allows investors to raise funds through a thoroughly regulated digital share of its equity, asset or part of the revenue.

The key difference between Security Token and Equity Token is that in the security token, an asset like real estate, gold etc. are used as collateral. However, in the case of Equity tokens, the shares of the company are diluted into tokens.

Security token offerings or Equity Token Offering

As the ICO industry keeps getting more impactful, many organizations are gaining their investor’s confidence by offering more security tokens through Security Token Offerings or Equity Token Offerings. These offerings, however, are regulated by regulatory bodies and carefully monitors the transactions and revise the auditing process to ensure there are no fraudulent activities happening. In this way, these are more secure than the traditional ICOs.

Final thoughts

Security tokens, equity token, and utility tokens are similar in the wordings; nevertheless, the main reason behind the distinction between these tokens is the matter of regulation. The year 2018 is the year of STOs and ETOs. These will be a popular option in the start-up circles for raising venture capital with the institutional investors.

Organizations have offered securities in the form of utility tokens to avoid the regulatory framework. One of the main reasons companies would want their Security tokens branded as utility tokens are the trading restrictions present on securities.

There is a lot of paperwork that is involved here, and these restrictions will potentially slow down the fast-moving start-ups. In that sense, Security token offerings will provide greater security and are fraud-proof. If you are uncertain about investing, it’s better to evaluate using Howey’s test as it is a good approximation to check whether something qualifies as a security or not.