Security and utility tokens are two major components in the crypto landscape that serve two different purposes, investment capabilities, and utilities. Let us comprehensively analyze these two items and how one differ from another.
Introduction
The cryptocurrency landscape is a complex space consisting of various difficult concepts and terminologies. Understanding each of them thoroughly is a necessary requirement if you are entering into that space, and to learn the key concepts of the rapidly evolving crypto arena, users might put extra effort. Security tokens and utility tokens are two crucial concepts that every crypto investor and enthusiast should be aware of. Utility tokens allow the holders to access the services and products within a blockchain network, whereas a security token is a digital asset that represents a claim on a real-world asset like real estate, debt, equity, etc. This article explores the key differences between security and utility tokens.
What are Security Tokens?
We can define security tokens in simple terms: it is the tokens of representation of a real-world asset’s ownership. The representation of traditional real-world assets like bonds, stocks, or real estate in digital form is the primary function of security tokens. Security tokens that provide ownership of an underlying asset recorded on a blockchain network are subject to all the existing rules and security regulations within the location or country. These kinds of tokens are treated the same as investments since they are subject to the regulations of the country.
The value of assets and security tokens is directly proportional; if an asset’s value increases, the value of the security token also increases. The value proportionality comes because the assets are pegged to that particular physical commodity.
Security token issuers must comply with all the security regulations and federal laws of the country. In the United States, the SEC is the responsible authority that decides whether a token can be classified as a security. To determine the security token or classify them, the SEC conducts tests like the Howey Test and validates them as security tokens and makes them subject to regulations. Major examples of security tokens are Polymath, tZero, Harbor, and Securitize.
What are Utility Tokens?
A utility token is a type of cryptocurrency that is exclusively designed to provide access to a specific product or service within a blockchain network. Utility tokens or user tokens serve functional purposes in the blockchain platforms. The major functional purposes of utility tokens are unlocking certain network features, paying for various services, participating in the governance programs of the network, etc.
These types of cryptocurrencies are not subject to any security regulations or federal laws since they are not considered investments. Utility tokens are generally issued through a process called Initial Coin Offering (ICO) or Initial Dex Offering (IDO). The usability and functions of utility tokens will vary according to the nature and functioning of blockchain networks, and they are generally created according to the particular project’s rules, rather than being mined like any other cryptocurrency in the market. Basic Attention Token (BAT), Filecoin (FIL), Siacoin (SC), and BNB are some of the examples of major utility tokens.
Differences between Security Tokens and Utility Tokens
Let us take a look at the major differences between security tokens and utility tokens that make each different and unique.
| Security Tokens | Utility Tokens |
| It represents the ownership of a real-world asset or commodity. | It provides access to certain products and services within a blockchain network. |
| It is considered an investment. | They are not generally classified as investments (in the traditional sense). |
| They are subject to security regulations and federal laws of the country. | Not subject to any kind of regulations or laws. |
| Holders can divide it and share the profits. | Cannot be divided and shared. |
| They are a safe investment since it is under regulatory oversight. | Risky investment compared to security tokens. |
| Asset’s valuation and token value are directly proportional. | No connection between the asset valuation and utility tokens. |
| Do not provide any rights regarding the network’s activity. | Provides network governance rights. |
| They are less volatile than utility tokens since they are pegged to a commodity or asset. | They are more volatile due to the reliance on network activities and their usage. |
| The market is more stable. | The market is more speculative. |
These are some of the major differences between security tokens and utility tokens. Understanding how they differ from one another will help the crypto enthusiasts and traders lead a better crypto journey.
Also Read: Was Your Crypto Exposed? How to Check If You’re a Victim of the Coinbase Breach?
The Bottom Line
Security tokens and utility tokens are two important parts of the cryptocurrency arena and blockchain technology. They are two different items and have so many similarities in functioning, regulation, and application. As the crypto landscape becomes wider, the need to understand each term becomes more important.
Recognizing and analyzing the purposes of both the security token and utility token, and customizing them with your goals, is the best thing you can do to effectively use these items. The choice is always up to the users; consider the factors like individual goals, risk tolerance, and market awareness before selecting one from this couple.