Utility VS Security Tokens

Various ways of doing business in the blockchain and cryptocurrency industry go in and out of fashion rather quickly, and such was the case with mega-popular ICOs in 2017.

The explosion of ICO crowdfunding campaigns that were offering utility tokens brought us many shady and scammy, but also more than a few brilliant projects.

One of those brilliant ones was Ethereum, which, through its technology, opened the doors for literally hundreds of better or worse ICOs. Therefore, we shall take Ethereum’s native cryptocurrency, Ether (ETH), as a prime example of utility token in our discussion.

Utility tokens and their crowdfunding campaigns

Utility tokens are nothing more than coupons which allow access to a particular product.

ETH was firstly issued through the initial coin offering (ICO) in 2014 as repayment for those who financed the project. Owning Ether doesn’t mean that an investor has a share in the ownership of the company, nor does it give him any voting rights. Instead, as Ethereum enables developers to issue their own tokens on its network, ETH is the only currency that will get you that sort of access.

In short, Ether is used for paying transaction fees and gaining access to the platform.

In 2018, the  US SEC officially proclaimed that Ether is not a security, and therefore, does not fall under the strict securities laws.

Ether was, in fact, never intended to be used an investment or an object of speculation as it is today. It was envisioned as something of value to help secure the network through “having something at stake” classical blockchain policy.

This shows us that, by investing in an ICO to get utility tokens, investors, if they are not developers, only get something whose value they can speculate on, trading it on some secondary market.

Lately, we have seen utility tokens, such as EOS or Tron’s TRX, appear. They provide voting rights, however governments are yet to decide if these assets will be regulated as securities.

In most countries in the world, ICOs are not yet regulated means of fundraising and can therefore, present the riskiest possible investments as there is no guarantee that the entity conducting such an offering will honour their whitepaper and offer a working product.

Security tokens and their crowdfunding campaigns

Security tokens give a whole other kind of value to the investor.

Contrary to the utility tokens, they put a percentage of the ownership into the hands of the investor, and, by doing so, provide him with a possible passive income through dividends, along with certain voting rights.

Simply put, security tokens are, in fact, still nothing more than digitalised securities which are supposed to be automatized by a series of smart contracts which are taking care of investors’ rights.

However, by doing a security token offering (STO), a company has to subject itself to a high degree of scrutiny from the financial watchdog of the country where they are conducting a crowdfunding campaign, and that turned out to be a major turn-off for the majority of crypto-related startup businesses.

During early 2018, the talk about security token offerings (STOs) became louder than ever as there were companies who were trying to produce a launching platform similar to Ethereum’s for security token issuance.

One such company is Polymath, which, probably because of that mentioned “buzzkill”, decided to conduct their crowdfunding campaign through offering utility tokens, which can be viewed as if Roger Ver, a fervent supporter of Bitcoin Cash (BCH), would pay for something in Bitcoin (BTC) instead of BCH.

Nevertheless, a truly open source project, which was not crowdfunded, recently launched under the name of Ravencoin, which enables its users to launch their own security tokens through a user-friendly interface.

Apples and oranges

Comparing these two types of tokens or their crowdfunding is really like comparing apples and oranges, as they are different from the core.

There is an entirely different motivation behind them, and the result is a different company-governing system.

Utility tokens are a part of a more or less decentralised ecosystem where users utilise a platform as they see fit, creating a new economy in the process, while the power to change the core system stays with the developer.

Utility token systems rarely have a clear chain of responsibilities, and disagreements in such systems usually end up in hard-fork of the blockchain.

Security tokens, on the other hand, provide ownership and voting rights, but those systems don’t offer a level of decentralisation that their counterparts do as security laws have clearly specified traditional company-governing choices.

Despite being hailed as the “next big thing” in crypto, security tokens are yet to take off as digital assets of any importance.

Still, there are many obstacles for that to happen, but as ICOs, and utility tokens along with them, are losing traction, it is clear that something is going to happen which will change the industry.

We’ll just have to wait and see.

Related article:

Singapore Government Introduces Blockchain-Based Security Token System