Undoubtedly, blockchain technology is poised to cause significant disruptions in various industries by making it possible to create an array of new business models. It has put forth interesting innovations like decentralization and trustless networks. One of the important factors which contributed to the success of this technology is the use of tokens.
At present, utility tokens and security tokens, have become million dollar concepts which startups throughout the globe are grabbing onto as they crowdfund. But how these terminologies differ from each other? Let’s dive in…
What Is A Token?
A token is a utility, which is a unit of value that’s been issued by a company. In most of the cases, tokens are issued at the time when a company launches an ICO (Initial Coin Offering). This works more or less like an IPO (Initial Public Offering). The difference between the both is that in an IPO you get stock in exchange for the investment that you make. Whereas in an ICO you receive token in exchange for your investment. If you wish to have a detailed view on ICO, you must know what is Initial Coin Offering (ICO)?
As mentioned, there are two types of tokens in the existence which you are most likely to meet in the ICO space –
- Utility Tokens
- Security Tokens
Confusion usually arises, when it comes to differentiating between both the terms. Even though they might seem complicated in the first place, they are actually very easy to comprehend as you will see in the subsequent sections.
Utility Token – What’s This?
Utility tokens are simply user tokens or app coins. They help future access to the products or services which are offered by a company. So, utility tokens are not made to be an investment.
Similar to an electronics dealer who might accept orders for a video game that will be released several months later, a business startup can create utility tokens and sell virtual coupons for the products or services it’s developing.
For example, Filecoin has raised $257 million through the sale of tokens. These tokens will allow users to have access to its decentralized cloud storage platform.
Security Tokens – What’s This?
A security token is a virtual asset that extracts its value from an external asset that is tradeable. In this way, these tokens are subject to federal rules and regulations which govern securities. Failing to comply with these regulations may result in harsh consequences, for example, penalties and potential derailment of the project development.
Also, security tokens come with an array of applications if the startup abides by all the regulatory needs and requirements. The most promising features of these are the ability to offer tokens as a virtual representation of shares of a company’s stock.
For example, Overstock latterly announced that one of its portfolio companies, tZERO would hold an ICO to finance the creation of an authorized security token trading platform. The tZERO tokens will be issued in accordance with SEC regulations.
The Last Thing!
Hope this article was helpful for you. And, now you can not only distinguish utility tokens from security tokens but their impact in the crypto world too. However, our beginner’s guide to security tokens could help you clear this term even more.