Cryptocurrency: Security vs. utility tokens

Bitcoin security

​​The decentralised nature of blockchain technology has revolutionised several industries with consistent adoption across markets. The cryptocurrency industry, now a decade old,  is integral in the technology and has been a major vehicle of blockchain adoption.

Bitcoin was launched in 2019, bringing the world the first “cryptocurrency”. Since then, we’ve seen the emergence of altcoins, Initial Coin Offerings (ICOs), non-fungible tokens (NFTs) and other branched-off cryptocurrencies. These are also referred to as “tokens”.

What are digital tokens?

Tokens are digital assets that are generated on a blockchain. They represent a unit of value that can be traded, used, or spent. The most common use case for tokens is to raise funds for early-stage projects.

These digital assets are the transaction units used on the blockchain. Tokens can be classified into two broad categories:

  • Security tokens, and
  • Utility tokens.

The digital currency ecosystem is booming and we are seeing an influx of new cryptocurrencies daily. With so many choices, it can be difficult to determine which token is right for you.

What are security tokens?

Security tokens are digital assets that are backed by real-world assets. They provide investors with a claim on the underlying asset, such as equity in a company, real estate, or other physical assets. security tokens are subject to federal security regulations. Many in the crypto community believe that security tokens are powering adoption.

Security tokens are those that pass the Howey Test, meaning they meet the criteria to be considered a security under United States law. This classification comes with a set of regulations that must be followed in order for a legal Security Token Offering (STO). Some of these regulations include registering the STO with the SEC and conducting due diligence on all investors.

The Howey Test was developed in 1946 and comes from a Supreme Court case, SEC v. W.J. Howey Co. In order for an asset to be classified as a security, it must meet all of the following criteria:

  1. It is considered an investment of money,
  2. There is an expectation of profits to be realised from the investment,
  3. The investment is in a common enterprise,
  4. Any profit comes from the efforts of a promoter or third party.

The benefits of security tokens

  1. The major benefit of security tokens is that they give investors ownership of a company or project. This gives security token holders a say in how the project is run and can provide a return on investment if the project is successful.
  2. Security tokens are also often used to raise capital for early-stage companies.
  3. Security tokens can provide a return on investment if the project is successful.

The disadvantages of a security token

One major downside of security tokens is that they are subject to stringent regulations. This can make them difficult and costly to issue. In addition, security token holders may have limited rights and protections compared to other types of investors.

Security tokens represent a new asset class that combines the best of both worlds: the security of traditional investments with the flexibility and utility of digital assets. Security tokens have the potential to transform the way we raise capital and invest in assets. By making it possible to fractionalize ownership of real-world assets and trade them

What are utility tokens?

Utility tokens are digital assets that provide users with access to a specific service or application. Utility tokens are not typically backed by real-world assets. They are often used to raise funds for early-stage startups. Many people in the crypto community believe that utility tokens will eventually power the majority of blockchain applications.

Utility tokens are those that do not pass the Howey Test and are not subject to security regulations. Utility tokens are meant to be used on a platform or within a community and give holders access to certain features or services. For example, the Basic Attention Token (BAT) is meant to be used on the Brave browser platform in order to reward content creators.

The benefits of utility tokens

The major benefit of utility tokens is that they can be used to power decentralised applications (dApps). DApps are software programs that run on a blockchain-based platform. They are often open-source and decentralised, meaning that anyone can contribute to their development. The most popular dApps are built on the Ethereum blockchain.

There are a few key reasons why many in the crypto community believe that utility tokens will eventually power the majority of blockchain applications in the future:

  1. Utility tokens are not subject to security regulations. This means that they can be used to fund projects without having to comply with complex and expensive financial security laws from the government. This makes it easier for companies to raise money and get started creating their dApp or platform.
  2. Utility tokens can be used to reward users for participating in or contributing to a project. Utility tokens help to create strong incentives for users to hold and use the token, which in turn drives up demand and price.
  3. Regarding use-case scenarios, utility tokens are more flexible than security tokens. They can be used for a variety of purposes, such as paying for goods and services, voting, or governance. This flexibility makes them more attractive to both end-users and application developers.
  4. Utility tokens are more likely to be adopted by mainstream businesses and organisations. This is because they offer a way to raise money without having to comply with security regulations. Mainstream adoption will lead to greater demand for utility tokens, which will drive up prices.

The disadvantages of utility tokens

  1. They are not backed by anything tangible, so their value is entirely dependent on market forces.
  2. They are subject to high volatility, which makes them a risky investment.
  3. They are not regulated, so there is no protection for investors if something goes wrong.

Security vs utility tokens: Which makes the better investment?

To recap, security tokens are backed by real-world assets and provide investors with a claim on the underlying asset. Utility tokens provide users with access to a specific service or application. Utility tokens are not typically backed by real-world assets.

When it comes to investing, it depends on your investment goals and risk tolerance. Security tokens may be subject to more regulations, but they also offer more protections for investors. Utility tokens are more volatile, but they have the potential for greater rewards.

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