Tokens is still a new concept that is quite difficult to understand by many. How to distinguish between their functionality? There is too much confusion about it. And this is normal. In our material, we will give a brief overview of the main types of tokens and try to explain as simply as possible what the differences between them are.
Blockchain as a token foundation
First of all, if we want to have a clear picture of the tokens, we need to learn from the ropes, that is understand what is blockchain.
The fundamental difference between a security token, a utility token and a cryptocurrency lies in what is written in the blockchain record.
In cryptocurrencies, these records would say “John owns 5 Bitcoins” or “John transferred 1 Bitcoin to Hannah”.
Utility tokens are mostly used by startups to raise money. You provide them with funds by buying their tokens, and later these tokens will give you special rights to use a product of this company. During Initial Coin Offerings (ICOs) companies mostly offer utility tokens. In utility tokens, blockchain records would say “John has the right to use platform X” or “John has the right to 10 devices of a company X”.
In security tokens, records say “John owns 1% of an asset X”. This asset may be a company, a piece of real estate, or a piece of art, etc. But in practice, existing security tokens mostly represent ownership of a company or a real estate. In the case of company security tokens are, basically, its shares. They give all additional rights, linked to ownership. In the case of owning a company, it is a voting right and a right to receive dividends, in case of real estate it is a right on a part of rental profits and so on. So investing in security tokens is in many ways like investing in traditional shares, but security tokens have a huge number of advantages, like enhanced liquidity, automated compliance and more. Security tokens offering (STO) is the same for security tokens, as ICO for utility tokens and IPO for traditional shares.
The difference in legal status
All other differences stem from this basic difference. It is noteworthy, that they also differ in their legal status. Cryptocurrencies are considered currencies by most regulators. Security tokens are considered securities in the US, so investors in them are protected by all relevant regulations.
This is the main advantage of security tokens comparing to utility tokens, which don t have definite legal status.
Many investors lost their money after investing in fraudulent ICOs. Nevertheless, there’s a growing demand for more liquid investment and an easier way for companies to raise funds. Security tokens satisfy this demand in a legally compliant way. That is the reason why there is an enormous amount of new companies that allow people to invest in security tokens and companies to issue them.
The sphere of cryptocurrencies is becoming more established. However, the world is changing very quickly and fintech innovations appear almost every month bringing new terminology to be defined and understood and then benefit from.
If you need more information about the legal framework for tokens or issuing utility tokens through an ICO, please sign up for an individual consultation on issuing utility tokens with our law professionals. We are ready to accompany the client at all the ICO stages or when registering a company with the ICO.