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What is Security Token & Utility Token? The difference between them

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What is Security Token & Utility Token? The difference between them

What is utility token?

Utility Token aka utility token. As the name suggests, it provides the owner with something related to the project , be it now or in the future. They have value, but projects do not generate utility tokens for investment purposes.

The utilities that Utility Token provides such as:

  • The right to access and use or special offers to the project’s products or services.
  • Used as a means of payment to participate in the blockchain network.
  • Create incentives for users to grow the network, such as providing liquidity and verifying transactions.
  • Acts as a store of value for payments inside and outside the blockchain.

Utility Tokens are usually distributed to users through ICOs (Initial Coin Offerings). Most tokens in the crypto market today are utility tokens.

ETH is an example of a pure utility token. In the Ethereum network, ETH is used to pay transaction fees and is a reward for mining participants.

What is Security Token & Utility Token? The difference between them

Advantages and disadvantages of Utility Token

Advantages

  • Liquidity is high because it is not affected by the limitations of legal regulations.
  • The issuer can take advantage of the Utility Token to effectively raise capital for the ICO project without the need for a finished product or service.
  • Provides the holder with the right to use the protocol’s product or service, contributing to the future development of the protocol.

Defect

  • Utility Token issuance cost is quite high.
  • Due to not being regulated by the law, the Utility Token issuance project may be a ghost or scam project. Then this token will have no value and cause damage to investors without being protected by law.
  • Utility tokens may lose value if the project fails.

What is Security Token?

Security Token ( security token) is a form of legally binding investment contract that allows the holder to receive dividends, income from revenue or have a voice in the business decision-making process . Security Tokens are secured by company assets.

In the case of Security Tokens, it represents ownership over off-chain assets, such as real estate, equipment, bills payable, or businesses. Similar to stocks, the value of a security token is directly linked to the value of the asset. This means that the more valuable the asset, the more valuable the token will be.

Instead of ICOs, projects distribute Security Tokens through STOs (Security Token Offerings). This is a fairly new form of fundraising for startup projects. STOs can be used to replace the traditional IPO model : issuing shares and voting rights through the blockchain.

Depending on the country, projects implementing STOs and issuing Security Tokens must meet certain legal requirements.

An example of a Security Token is tZero by online retailer Overstock. It allows token holders to enjoy quarterly dividends derived from the profits of the tZERO platform.

What is Security Token & Utility Token? The difference between them

Advantages and disadvantages of Security Token

Advantages

  • Due to the regulation of the law, if the project does not comply with what has been committed to the investor, they will be fined according to regulations. This greatly reduces scam and bogus projects and increases investor confidence in technology projects.
  • Today’s traditional financial transactions have the disadvantage of expensive costs and longer time than transactions on the blockchain platform. Using Security Token not only takes advantage of the fast and transparent advantages of blockchain technology, but also brings peace of mind to investors because owning Security Token is owning the project’s assets.
  • With Security Token, project owners can easily reach freelance investors from all over the world more easily through the Internet. Conversely, investors can also easily buy tokens of potential projects.
  • Help reduce the cost of legal consulting services and operating costs for the project.
  • Blockchain technology minimizes the role of intermediary organizations involved in financial transactions. Thereby, reducing the risk of manipulation and vandalism.

Defect

  • Currently, there is still no separate and clear regulation on how to evaluate Security Token and its issuance conditions.
  • The complete elimination of intermediaries will increase pressure on both project owners and investors.
  • Being subject to many legal regulations such as restricting investment objects, how tokens are traded, exchanged, … can narrow the development ability of the project from the very beginning.

Difference between Utility Token and Security Token

Utility TokenSecurity Token
Utility tokens have practical use value and usually do not serve investment purposes. Utility Token holders have the right to access/use or receive incentives for the project’s products or services.Security Token represents the right to vote for the development of the project or the legal ownership of the holder with digital assets or real assets verifiable using blockchain technology. Therefore, Security Token can be viewed as an investment contract.
Utility Token issuance projects can be startup projects that have not yet completed products/services or have completed but have not been released to the market.Because Security Token is tied to the project’s voting rights or assets, it requires the issuer to be active and have assets. Such assets can be real assets, digital assets or profits from the project’s business.
Utility Tokens do not give investors any rights to company assets, project development decisions, or project profits.Similar to shares, the project that issues Security Tokens will guarantee investors a profit arising in the future such as dividends or voting rights.
In addition to fundraising, Utility Tokens are mainly used by projects to attract users’ interest in their products or services as well as to apply and create value in the blockchain ecosystem.Security Token is issued purely for the purpose of raising capital, which is a certificate for investors’ ownership of the project.
The value of the Utility Token changes based on the supply and demand for the project’s services and products.The token value is tied to the value of the company/project that issues it.
Since Utility Token is not under the control of the law, it is very easy for the project that issues the token to be a scam or fraud project.In some countries, Security Tokens are regulated as a security and must meet strict regulations when issued to the public. Therefore, when investing in projects that issue Security Tokens, scams or scams are very rare.

How to know if a token is Utility or Security

In the US, STOs and token sales are subject to the securities regulations of the SEC (US Securities and Exchange Commission). To evaluate a token as Security or Utility Token, the SEC has issued the Howey test (drafted in 1946). This review establishes guidelines for considering whether a financial arrangement involves an investment contract and is subject to securities regulations. According to the head of Cooley LLP Fintech, Marco Santori said that this classification would create a sense of security if “a normal business wishes to gain profit from the efforts of others.”

Howey test aims to answer the following two questions:

  • Does the Token provide the owner with the opportunity to fund the project and receive a share of the profits?
  • Will the project’s profits come from the token holders who create the buying and selling force (supply and demand) for the token. Thereby directly affecting the token value or not?

If the answer is yes, then the token is most likely considered a Security Token under SEC regulations.

Similar to the framework laid out by the Howey Test, the European Union’s financial authorities have developed legislation that documents a set of criteria for determining what constitutes a security. In addition, the proposed new law states that Security Tokens based on distributed ledger technology (DLT) will be subject to the European Markets Directive in Financial Instruments MiFID II and corresponding regulations.

Many other countries also have their own legal standards to determine if a digital asset is a security and the respective regulations that Security Token and STO must follow such as France, Lithuania, Switzerland , Israel,…

Conclusion

Above is the information you need to know about Utility Token and Security Token as well as the difference between these two types of tokens.

The cryptocurrency market has a variety of tokens with different functions and applications. Mastering how to distinguish these tokens will help you understand the rights and benefits you can receive when investing in a certain project.

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When will Bitcoin Rally Start? Technical Analysis:

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When will Bitcoin Rally Start? Technical Analysis:

Bitcoin dropped today after briefly kissing the $59900 and as the selling pressure rose it dropped swiftly and the slump continues. The question is when will the Bitcoin rally start?

When will Bitcoin Rally Start? Technical Analysis:

TradingView Bitcoin Chart

Bitcoin Rally: Technical Analysis

The Bitcoin price today is $54,346.67 USD with a 24-hour trading volume of $42,612,427,726 USD. Bitcoin is down 7.79% in the last 24 hours. The current CoinMarketCap ranking is #1, with market cap of $1,026,280,520,107 USD. It has a circulating supply of 18,883,962 BTC coins and a max. supply of 21,000,000 BTC coins.

Bitcoin has found its support at fib -0.65 and has an increased volatility today. Bitcoin is currently trading below EMA 20 on an hourly chart which indicates that the Bearish trend is volatile. The relative strength indicator shows that Bitcoin has entered an oversold situation. This means that now it should start getting the buyers in and the price should rise to the previous highs of yesterday.

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Nike to bring Sneakerheads to Metaverse?

For the fiscal year May 2021, Nike Business was up 19% which is worth $44.5 billion profit for a year with a market capitalization of $275.7 billion.

Nike to bring Sneakerheads to Metaverse?

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Even if you have opened a safe position, the volatility still can kill your profits and turn your portfolio to half or below, that’s why using a stop is mandatory.

A stop loss is an auto trade call that a trader sets to avoid more losses in case the market does not move in the desired direction. For example, If you opened a long position of Bitcoin at $60,000 and you think it will rise to $65,000 or $70,000. But the unfortunate happens and Bitcoin starts to drift downwards. Now you will have to decide how much loss you can face and exit the trade. So, you exited the trade at $59,500 and then Bitcoin dropped to $55,000, you saved plenty of loss. Now from here, you can again open your long position by putting another stop loss below. This has not saved your losses but you were able to open a long position at a better price.

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