There are two basic types of tokens: utility and security tokens.

Utility tokens

If we imagine a blockchain company as a car, utility tokens are the fuel. Just as fuel is injected into the engine and combusted to produce energy, utility tokens feed the blockchain company and maintain its activity. The company issues utility tokens for financing the development of its projects, and this allows the token holders to buy different company products or services. Another similar example of utility tokens is a video game currency, which allows purchasing in-game items or services. BANKEX tokens are classified as utility tokens, and participants in the BANKEX community can buy them and use the BANKEX services. It is essential that utility tokens are not considered or advertised as investments, and therefore avoid falling under government regulations. However, just like any other asset or product, the price of utility tokens will rise if a company’s developments are in high demand.

Security tokens

In contrast, security tokens are designed to be tradable assets and are issued to investors in the pursuit of future profits. Security tokens take the place of stocks in the world of cryptocurrency and as a result, fall under government regulations.

Regulation

Regulation is an inevitable and necessary part of realizing innovative, successful products. AI, self-driving cars, cryptocurrencies — these all keep lawmakers busy writing new laws. For developing technology, regulation can be both help and hinder. Some can overregulate and create excessive bureaucracy which slows down the pace of bringing the product to market. This is best exemplified by the Dodd Frank Act (2010), written and passed in response to the 2007–08 financial crisis. However, as we have written in our China series, it can also make the industry more respected and even attract wealthy investors.

But before diving into the world of cryptonomics it is necessary to become acquainted with the role of regulation in cryptocurrency markets. The token issue is at the center of the crypto-world. As the market grows and begins to compete with venture capitalists, authorities will undoubtedly experience a strong pressure to keep pace by updating the regulatory code. At the moment, regulation of tokens differs by type: security tokens and utility tokens.

Security tokens

Essentially, security tokens are securities. The US Securities & Exchange Commission defines securities as: «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». This definition means that anything invested externally with the primary goal of achieving profits is a security. Thus security tokens are those that are invested externally in order to produce dividends.

In the ICO world security tokens often mean selling shares of the company in the form of tokens. This practice is now regulated by the Securities and Exchange Commission (SEC), and certain actions, such as advertising high returns and profits, are viewed with suspicion and may be subjected to audits conducted under US commercial law. For example, one reason for the investigation of the ICO Munchee, the SEC highlighted the use of advertisements such as: «$1000 investment could create a $94000 return» and «the more users who get to the platform the more valuable your MUN tokens will become». This ICO was considered a securities issue even though the company was only selling access to its services, not actual shares.

Remember, if a startup is trying to convince potential token buyers of high returns to their investment, this ICO becomes highly prone to SEC investigation.

Utility tokens

The second ICO component concerns the issue of utility tokens. In contrast, these assets are not prone to regulation by the SEC because they are not considered securities. Utility tokens are defined as something that gives access to the company’s services but doesn’t promise to bring profits. It is often compared to the pre-sale of the product or crowdfunding practices: users give money to the business in exchange for access to the products.

Bloomberg’s Matt Levine compares utility tokens to the Starbucks card: «A Starbucks gift card is probably not a security, even though you pay money to a corporation for the card and expect to get back something in the future, because you are not investing the money in the expectation of profit: You’re investing it in the expectation of coffee».

It may seem that today there are no utility tokens as all crypto-investors aim to derive high profits, but famous crypto-assets such as Ripple XRP and BAT are not considered by SEC to be securities. The main goal of purchasing these assets is to get access to the ecosystem, not to gain profits. The same mechanism functions with the BANKEX BKX Utility Token — the main value of the token is the access to the BANKEX Proof-of-Asset Protocol tokenization platform.

At the moment crypto assets are divided into two groups: securities and utilities. While security tokens are regulated by the Securities and Exchange Commission, utility tokens are not prone to regulation. In order to distinguish one type from the other authorities look at how the token is advertised by the issuing company. If the asset is publicized as a way to earn profits, it is highly likely to be investigated and regulated. If the asset is introduced as access to the company’s product, it will be considered an utility token and financial authorities are not likely to investigate it.