Utility tokens and security tokens: A comparison of their main differences and examples

In the rapidly evolving world of cryptocurrencies and blockchain technology, tokens are crucial since they allow several jobs within decentralised ecosystems. These digital currencies primarily come in two varieties: utility and security tokens. Utility and security tokens, although seemingly similar at first, serve different purposes and are subject to different laws. This blog explores the key differences between utility and security tokens and provides examples that emphasise each one’s specific features.

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Table of Contents

• Recognising Utility Tokens
• Comprehending Security Tokens
• Important Distinctions Between Security and Utility Tokens

Recognising Utility Tokens

Definition and Objective

Utility tokens are digital assets designed to provide consumers on blockchain-based platforms with access to specific products or services. Not intended as investments, but rather as instruments that enable users to interact with the platform’s capabilities. In ecosystems, utility tokens are often used to pay for services, unlock features, and promote participation.

The features of utility tokens

• Functional Access: On a blockchain network, utility tokens grant their owners access to certain features or services. They act as a channel for information exchange within the ecosystem.
• Non-Investment Nature: These tokens are typically not thought of as investments because their value comes from their use on the platform rather than from any underlying assets or revenue streams.
• Regulatory Considerations: Utility tokens are often subject to less regulatory scrutiny than security tokens, though this can vary depending on the area.
• Utility Token Examples
• The Binance Coin (BNB): It is the native token of the cryptocurrency exchange. On the Binance Launchpad, BNB pays for token sales, user discounts, and trading commissions.
• Chainlink (LINK) is the payment mechanism for services and data feeds within the decentralised Oracle network. It incentivises data providers to supply reliable and accurate data to smart contracts.
• Filecoin (FIL): Storage space and retrieval services are paid for using Filecoin within the Filecoin decentralised storage network. Users may earn FIL by renting out their vacant storage space.

Comprehending Security Tokens

Definition and Objective

Security tokens, also referred to as digital securities, are tokens that signify ownership of an underlying asset, such as stocks, bonds, or real estate. The purpose of these tokens is to offer benefits and characteristics that are comparable to those of traditional securities, like dividend payments, interest payments, and voting rights. Security tokens are widely utilised to raise capital in addition to providing investors with a transparent and secure way to keep and exchange assets.

The features of security tokens

• Investment Nature: Security tokens fall under the category of investments because they are frequently backed by physical assets. The performance of the underlying asset determines their value.
• Regulatory Compliance: Since security tokens are governed by securities standards, they must adhere to strict legal and regulatory requirements. This means registering with regulatory bodies and adhering to investor protection laws.
• Ownership Rights: Owners of security tokens are eligible for a number of ownership benefits, including profit-sharing, dividends, and voting rights inside the issuing business.
• Security Token Examples
• TZERO [TZROP]: TZERO is the name of the platform used to trade tokenised securities. The TZROP shareholders hold shares in the tZERO company and are entitled to dividends based on the performance of the business.
• Harbour [HBR]: Issue security tokens backed by real estate is made simpler by Harbour. Investors can purchase tokens representing ownership in various real estate holdings; they will get returns based on the appreciation and rental income of the properties.
• Polymath (POLY): It provides a platform for creating and managing security tokens. It offers a variety of tools and resources to ensure adherence to regulatory standards, enabling businesses to tokenise their resources in a transparent and safe manner.

Important Distinctions Between Security and Utility Tokens

The purpose and functionality

Utility Tokens: Within a certain platform or ecosystem, their primary function is utilitarian. They can be used to make payments, obtain access to services, or promote participation.
Security tokens: They stand for ownership of an underlying asset and are meant to offer investment options. They confer on holders rights similar to those of traditional securities, such as dividends and voting.

Regulatory Structure

• Utility Tokens: Under the regulatory framework, utility tokens are typically not as closely scrutinised, though this can change based on the situation. Most countries do not mandate that they follow securities legislation because they are not regarded as securities.
• Security tokens: They must abide by laws protecting investors and register with securities regulators, among other stringent requirements. Issuers must adhere to strict legal standards and give full transparency.

Proposition of Value

• Utility Tokens: Their value is based on how helpful they are on a particular platform. Demand for utility tokens is fuelled by the platform’s adoption and users’ advantages.
• Security Tokens: A token’s value is based on how well the underlying asset performs. Similar to conventional investments, buyers of security tokens aim to earn profits based on how well the asset performs.

Examples

Security Tokens: Polymath, Harbour, and tZERO Utility Tokens: Binance Coin, Chainlink, and Filecoin

In summary

Professionals in the blockchain and cryptocurrency fields need to understand the distinctions between utility and security tokens. Utility tokens provide advantageous benefits within particular platforms, whilst security tokens offer investment alternatives backed by actual assets. While both types of tokens are necessary in the emerging digital economy, their purposes and value propositions differ depending on the legal context. Visit The Knowledge Academy to learn more.