Security Token VS Utility Tokens

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By Matt Hussey

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Jan 16, 2019

A utility token is typically a token that allows an owner to use a product or service. A security token is a type of token that’s regulated by financial authorities, and as such, attractive to institutional investors. Both represent an increased specialisation in the types of token now being issued.

What you will learn

What you will learn

The difference between a security and utility token, what they are both used for and what they mean for decentralisation more broadly.

As the blockchain world matures, so do the tokens this new decentralized world is built on. We’re now starting to see tokens designed to serve more specialised purposes - above and beyond just a store of value, like Bitcoin. Two of the biggest new types of token emerging are security and utility tokens. But what are they? We’re about to find out.

What are utility tokens?

Utility tokens are tokens that give you access to a product or service produced by a company. The idea behind these sorts of tokens is users will use them - and the services they are attached to - rather than hold on to them. In 2017, Filecoin Filecoin raised $257 million by selling tokens that will provide users a way to access and use its decentralized cloud storage platform.

Because these types of tokens are essentially tiny slices of a product, the creators typically refer to the token sales as token generation events or TGEs as opposed to ICOs. Although the debate over whether ICOs and TGEs would be classed as different products legally speaking is ongoing.

Famous types of utility tokens

  • Golem - A type of network that allows people to rent computing power from others.
  • Basic Attention Token (BAT) - a type of token designed for the advertising industry.
  • Filecoin - a type of centralised cloud storage.

Did you know?

Golen raised $8.6 million in just 26 minutes during its ICO.

What are security tokens?

Security tokens are tokens that are tradeable. The ‘securities’ moniker comes from the financial term of the same name, which refers to the name given to a fungible, tradeable asset that has some financial value attached.

A security token can represent a share in a company, a voting right in how the company operates, a unit of value, or all three. The key difference between a security token and a security is the token security is automatically organised and managed through smart contracts.

There is much interest in security tokens from the financial world, thanks to its ability to cut out middlemen from the trading process, lower the costs of creating and maintaining securities, and increasing transparency, thanks to all transactions being written on a decentralised ledger.

Perhaps the biggest and most important concept to understand about security tokens is that they are a type of token that needs to be compliant with financial regulators. As such, these token offerings have been called Security Token Offerings, or STOs, and are designed with institutional investors in mind.

Famous types of utility tokens

  • Polymath - designed to be the Ethereum of security tokens, thanks to its own token standard called ST20.
  • Swarm - wants to help tokenise real world assets like property, renewables and agriculture.
  • Tokeny - a platform designed to help people launch their own tokens (as well as its own)

Did you know?

If all current securities were tokenised and put on blockchain, it would become a $1 trillion industry.

The future

This is just the beginning of tokens becoming more specialised as time goes on. Other classes of token are emerging. Privacy coins like Zcash, and decentralized coins are becoming a class of their own, too.

Security tokens are creating huge buzz around the blockchain space, as they suggest institutional investors are keen to get involved. If this happens, the value of the whole industry could increase dramatically. But for now, it’s still early days.

By Matt Hussey

Learn

Jan 16, 2019

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2019 © Decrypt Media, Inc. All Rights Reserved.

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