UTILITY Token vs SECURITY Token, what are the differences?

 

Crypto tokens characterize a particular fungible and tradable commodity or a utility that is habitually found on a blockchain.

 

Crypto tokens are a special unit of pseudo-currency that dwells on their own blockchains and signifies an advantage or adequacy. The crypto tokens work over a blockchain that goes about as a medium for creation and execution of decentralized applications and smart contracts, and the tokens are utilized to encourage the exchange. Such crypto tokens are usually created, distributed, sold and circulated through the standard initial coin offering (ICO) process that involves a crowdfunding exercise to subsidize venture improvement.

 

 


Kalin Stoyanchev, the Project Lead at RNDR states:-

Utility-based blockchain projects are here to stay because they actually solve real issues that users and/or companies have within their specific processes. The overall market cap and value of other cryptocurrencies such as ETH and Bitcoin do not directly affect the problem and solution that utility tokens are here to solve. It will take time for adoption in the market – naturally, during this time there will also be fluctuations in asset prices of some of the larger cryptocurrencies.”


 

 

Based on whether the token passes the set standards of the Howey test, they are classified into two components.

 

They are:

(i)        Utility Token/Fails Howey Test

(ii)       Security token/Passes Howey Test

 

 

The “Howey Test” is a test created by the Supreme Court for deciding if certain exchanges qualify as “investment contracts.” If along these lines, at that point under the Securities Act of 1933 and the Securities Exchange Act of 1934, those exchanges are contemplated as securities and therefore subject to certain exposure and registration necessities.

 

The principle of HOWEY is based over the following four major considerations:

(i)      There is an investment of money

(ii)     The user expects to profit from the investment

(iii)    Investment of money is in a common enterprise

(iv)    Any profit comes from the efforts of a third party or promoter

 

 

 

Utility tokens, also called user tokens or app coins, represent future access to a company’s product or service. The characterizing feature for utility tokens is that they are not planned as an investment; if appropriately organized, this component liberates utility tokens from federal laws administering securities. Utility tokens, in spite of the fact that not intended for benefits, may gain at price and accordingly procure benefits in future.

 

Utility tokens are not intended to give their holders the ability to control how decisions are made in a company. They merely enable users to interact with a company’s services.

 

The expression “ICO” is a subordinate of “initial public offering” (ICO), utility token creators usually refer to these crowd sales as token generation events (TGEs) or token distribution events (TDEs) to evade the appearance that they are participating in a securities offering. These tokens basically give clients a product or service like gateway tokens. Since limitation to the token availability exists, the value of the tokens may rise in price on account of supply-demand equation. As it fails to qualify Howey test it’s considered as Utility token.

 

 

What does utility token have to offer?

(i)   Give holders a right to use the network

(ii)  Give holders a right to take advantage of the network by voting

 

 

If a crypto token derives its value from an external, tradable asset, it is classified as a security token and becomes subject to federal securities regulations. Failure to abide by these regulations could result in failure of the project. Security tokens are in demand as security regulations in the respective jurisdictions govern them. Cryptographic tokens which pay dividends, share profits, pay interest or invest in assets to generate profits for the token holders are known as security tokens. They bring automation and swiftness to the whole process as the user creates a programmable security.

 

Security tokens are created as investments. Token holders are given dividends in the form of additional coins every time the company issuing the tokens earns a profit in the market. Users holding the security token also get ownership of the company. Blockchain offers a platform that can be used to create a voting system that allows investors to exercise control on the company’s decision-making process

 

It’s inevitable that security tokens will transform equity because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market. Security tokens are regulated thus limited on who can invest in them and how they can be traded. Subsequently, the liquidity of such tokens is drastically reduced.

 

 

 

 

Content and Infographic compiled by – The Crypto Updates

 

 

 

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