Utility tokens vs. security tokens: what are the differences?
What are Utility Tokens?
Utility tokens, also known as 'user tokens', serve a specific function within a decentralized application or ecosystem. They are commonly issued during Initial Coin Offerings (ICOs) or Initial Dex Offerings (IDOs). Holders of utility tokens enjoy certain privileges such as access to specific services or discounted fees.
For instance, Basic Attention Token (BAT) is used by advertisers as a means of payment for different services on the Brave browser. Users may receive BAT rewards for viewing advertisements and these can be utilized within the ecosystem.
What are Security Tokens?
Security tokens serve as a representation of ownership in a real-world asset.
They give its holder ownership access to that asset. Security tokens demonstrate ownership, partial ownership, or shares of an asset or project, similar to traditional security assets like stocks.
If the company’s valuation increases, so does the value of the security token. Companies and holders must comply with regulations and federal laws, such as the Howey Test in the U.S., which determines if there is an investment contract and whether the token is used for acquisitions with expected returns.
Differences between Utility Tokens and Security Tokens
The key differences between utility tokens and security tokens lie in their usage, valuation, and regulation.
Security tokens are contracts that represent a share in the company or entity that is issuing the token. In contrast, utility token holders do not have an actual stake in the company and will not generate any return. There is no connection between the asset’s current valuation and utility tokens.
Utility tokens are largely unregulated, while for security tokens, companies and holders must comply with regulations and federal laws.
Comparing Utility Tokens and Security Tokens
Security tokens may provide holders with a potential compensation tied to the asset they represent, similar to traditional stocks or bonds.
They are subject to federal securities regulations, which can provide added security and transparency. However, they also carry additional risks, such as regulatory changes and market fluctuations.
On the other hand, utility tokens provide access to a product or service and are not considered securities. As a result, they are not subject to the same regulations as security tokens and can be more volatile in price. However, they may provide holders access to new products or services.
Both utility and security tokens have their unique features and potential benefits. The choice between acquiring utility tokens or security tokens depends on an individual's goals, risk tolerance, and understanding of the cryptocurrency market. It is crucial to conduct thorough research and due diligence before acquiring any type of token.
