What are the types of crypto tokens –Security Vs Utility?

First let us understand what crypto tokens are. In short, projects launch an ICO by issuing crypto tokens on the blockchain( Usually the Bitcoin or the Ethereum blockchain), which gives the investors a chance to own tokens in exchange for cryptocurrency. Basically tokens are units of value created on blockchains that acts as a host for it.

Tokens can be in the form of coins, points, certificates, in-game items, etc. They are often used to raise funds in a crowdsale.

There are 2 major categories of crypto tokens , security and utility tokens.

⦁ SECURITY TOKENS

Security tokens entitle their holders to the ownership rights of the company. A security token is backed by external tradable assets.

They give company the ability to issue tokens that represent shares of company stock. These tokens are subject to federal securities regulations.

They provide various financial rights to an investor such as equity, dividends, profit share rights, voting rights, buy back rights, etc.

Security tokens like all other securities, are regulated by regulatory bodies like SEC(USA) and SEBI(INDIA). Failure to abide by these regulations can result in cost penalties and could derail their project.

⦁ UTILITY TOKENS

Utility tokens are services or units of services than can be purchased.

These represent future access to a company’s product or service. It is not designed to be am investment. It may best be compared to a gift card, for example. They function as coupons and give holders no rights or stake in a company’s platform or assets. They are not designed as investments, however many people contribute to utility token ICOs with the hope that the value of the tokens will increase as the demand for the company’s product or service increases. It is important to note that “utility token” is an organisational sistinction and not a legal one. The SEC has not given any official guidance on utility tokens, so the indutsry does not know with certainity whether they are subject to security regulations.

SECURITY V/S UTILITY TOKENS

The main reason for the distinction between these tokens is because of the reglation that is required for security tokens.

One of the main reasons companies would want their tokens branded as utility tokens are the trading restrictions present on securities. These restrictions slow down the fast-moving start-ups by hindering them with regulations and due diligence they don’t wish to participate in.

You can never say which the best token is. In the table below, you can see the major differences between two types of tokens.

Both the tokens have one essential trait in common — their primary function is to attract investors and facilitate the fundraising campaign.

Hence it’s impossible to say that security tokens are better than utility or the other way around. For a company running an ICO, it’s crucial to decide how much freedom they want to give their investors and what kind of relationships they are ready to maintain.

Meanwhile, potential investors should clearly understand what rights they would enjoy when they purchase either of the tokens.