If you are new to the cryptocurrency and blockchain industry, the term token may be familiar to you. However, lets provide you with some more enlightenment.
What is a Token?
Blockchain projects issue tokens as a unit of value, while smart contracts built on blockchain manage these tokens. Sometimes, projects issue these tokens during ICOs to generate startup funds for their vision.
Types of Token
There are basically two different types of tokens:
- Utility tokens
- Security tokens
Tokens are easy to distinguish and this is what we shall explain in this section.
Utility tokens are created to provide a means transfer of value using the service of that particular project. You cannot use the product or service within the project’s ecosystem unless to have its utility tokens. Utility tokens are usually raised through crowdfunding or Initial coin offerings (ICO), even though this is not a rule though as there are many projects that did not raise funds through ICOs.
A business startup may develop the utility token to raise the funds for the project and then use those funds to develop the business.
Security tokens are created for investment purpose, so when you invest in a security token, you become a stakeholder in the project. Such tokens acquire value from the gains or losses of the project. You can compare it with the shares in the company as security token concept is pretty similar to the shares. However, a project needs to fulfill all the regulatory requirements before issuing the security tokens.
Difference Between Utility and Security Tokens
|Utility Tokens||Security Tokens|
|Not for investment purposes||Raised for investment purposes only|
|Holding Utility token gives you no share in the company||You become a part of the company if you hold security token|
|No dividends are received by holders||Token holders can receive dividends in the form of additional coins|
|Allow to interact with company services||Tokens are purely collected to invest in the company and not to avail any services|
|Holders cannot be a part of the company decision process||Holder have a say in the company decisions|
If you invest in either Security or Utility tokens, both can increase in value over time so you need to find a good project to invest in irrespective of the type of token they offer. Many people still finds it difficult to differentiate between the two as they have few similarities. To make this process simple and easy to understand, SEC uses the Howey test to determine what sort of token a project offers. If the buyer is in it for gain, it is a security.