UTILITY TOKENS vs SECURITY TOKEN
Introduction
This year we've witnessed enormous drop in price of pretty much every single crypto on the market. Caused mostly by lack of regulations and growing distrust. Currently hardly anyone want to invest in any new ICO. Lack of trust and fear are putting off investors and it doesn't seem that this trend will change anytime soon.
At the same time Security Tokens are growing slowly in popularity as many believe that STO will be future of cryptocurrencies. Will STO eventually kill demand for any upcoming ICO, causing currently existing project and ICO to collapse even more?
| We in @creativeblue would like to know what's your view on this particular topic. And if you're not aware what Security Tokens are and how are they different from ICO then I would strongly recommend to get familiar with this issue. |  |
|---|
Today @focygray is sharing with us his knowledge and explain what are the differences between those two. STO vs ICO.
ENJOY READING :)
NEW ERA OF TRADING ASSETS
Since the discovering of the bitcoin and other cryptos, the blockchain has experienced a massive improvement in the development of decentralized technologies that seems promising to investors. Not only does these technologies removed the barriers of middle man involvement in trading and other financial transactions, they've also introduced a new era of storing traditional assets as digital assets using the blockchain consensus protocols to secure and remove a third party barriers. However, despite this promising future of cryptocurrencies and digitalizing of traditional assets, it is expedient to look before you loop.
On this article, I will try my possible best to outline some important things you need to know before you invest in digital assets.
Before now, Bitcoin worth about 0.08 dollars when it was first created. Imagine those who invested in it then would be multi millions of dollars richer now. That is what is motivating a lot of investors in investing in new tokens because they never know if these new tokens might rise to fame someday like the bitcoin did. Nevertheless, it is advice to always know the genuineness of new tokens or new technologies on the blockchain that wish to launch new tokens (ICO, Initial Coin Offering) before you invest in it/them.
In 2017, there were over 500 new tokens launched into the blockchain with different motives and different idealogy. Some managed to come up with tokens that have a promising future that made investors think that someday they might be like the bitcoin. Now, let me tell you the different types of tokens and why you should be careful before you invest.
TYPES OF TOKENS
- Utility tokens
- Equity Tokens and lately, Security Tokens
Equity Tokens are a subcategories of Security tokens so, I will treat it as Strictly Security Tokens.
WHAT ARE UTILITY TOKENS
In a simple sentence, a Utility token is an ICO launched to add value to a technology launched on the blockchain. In other words, a Utility Token is a token use for transactions in a particular tech. According to Josiah Wilmoth,
Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. Through utility token ICOs, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.
This is to point out that the value of a Utility token depends on the success of the technology which it backed. If it is an exchange platform for instance, the token value will rise if there are more participants to the exchange and the token is in high demand vice versa. Or if it is a blockchain gaming platform, it will depends on the demand of the token by the players for it to rise to a better value.
Utility tokens are not designed as investments; however, many people contribute to utility token ICOs with the hope that the value of the tokens will increase as demand for the company’s product or service/technology increases.
WHAT ARE SECURITY TOKENS?
Have you ever bought some shares from a company? What are the process you went through before you became a bonafide share holder of that company? Did you signed a lot of documents to identify you as a holder of part of the company's assets? As a shareholder of a company, does it mean you physically owns a part of the company? This is the old traditional way of becoming a shareholder of a company. Thanks to a new era of cryptocurrencies that has changed the way assets can be own.
We've talked on Utility tokens as tokens that are dependent on the progress of the technology they backed. On the other hand, A Security is a trade-able financial asset that gives owners the right to be a shareholder of a company without physically claiming to own a physical property or claiming actual possession of the company's properties. Companies and other traditional parastatals used this means to raise funds from investors with a promise of a profit in return as form of dividend or interest rates or share of company’s profit in some form or other. When this is done in a cryptographic manner, they are termed Security tokens.
In simpler terms, security tokens are cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders. This takes care of the liquidity issues.
Security tokens have to be backed by a tangible asset, like a company’s profits or shares or any financial tradeable asset.
DIFFERENCE BETWEEN UTILITY TOKENS AND SECURITY TOKENS
Simply put, while both Security and utility token prices may fluctuate, the key difference is that Security tokens entitle the holder to ownership rights, while utility tokens function as coupons and do not provide holders with an ownership stake in a company’s platform or another asset.
INVESTING IN SECURITY TOKENS
Now you know the major types of tokens on the blockchain. Utility tokens and Security Tokens. Investing in any of these two is of a personal choice that is based on whether you can wait for the company to make some profits for you to have a share (Security tokens) or a token that can be traded in any exchange with the current exchange rate that is based on the progress of the tech behind it or the increase in demand of the token (Utility tokens). It is more like a Security Token is a long term investment compared to Utility tokens. So be wise and invest properly in the crypto market.
REFERENCES
- https://chainsulting.de/en/security-token-the-next-stage-of-tokenized-economy/
- https://coinsutra.com/security-tokens-vs-utility-tokens/
Author: @focygray
Hope this article help on your understanding about Utility tokens and Security Tokens? Cheers!
If you enjoy his work then drop a comment and rememeber to visit @focygray blog and show your support by following him.
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simple and good article about definition of utility token and security token...
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Your wallet memo brought me here. Well written article. There will always be those who want to regulate other people's work to make a buck and hold power and certain kinds of regulatory framework has its benefits too (such as fraud protection). People should be free to invest in whatever they want as long as their investment doesn't violate the NAP (terrorism, theft, assassinations, cyber attacks etc.)
We Already Have A Solution
Look into Komodo Decentralized ICOs. You know how crypo are unstoppable. No government can shut down STEEM/EOS or even something like torrent files. Decntralized ICOs does the same for ICOs. Everything is handled P2P on Komodo network.
Look it up. You'll love it.
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Amazing comment @vimukthi
You've mentioned that no gov can shut down STEEM/EOS. And most likely you're right. But they may easily force all major exchanges to remove them from their listings. Or spread some extra FUD which would destroy value of those crypto.
I will also look into Komodo. I found topic related to STO very interesting.
Cheers
Piotr
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The governments will have to work with each other and it'll be little tough as many exchanges have established their operations around more crypto-friendly jurisdictions. But since 99.99% volume comes from centralized exchanges, the price would take a massive hit. But DEX will have a great time after that.
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Is this a brave new world for the concept of money?
You bet!
(Money = value)
(What is value-able?)
(Work, time, energy, etc.) x (time/energy cost)
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Im very sorry for such a late reply @vimukthi
Thank you for being so responsive. Steemit needs people like you.
yours
Piotr
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I learn more the to utility token than the security token im really a fan of a coin having value because of its actual use and its ecosystem and that encouraging use and adoption has a direct effect on the value
I think more projects should adopt this economic model and try to create real value and not just speculative value
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Thank you for your kind comment @chekohler
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I think in current state of legislation and cryptocurrency technology, "the old traditional way of becoming a shareholder of a company" is better because it provides more liquidity and less legal issues than security tokens. However, that may change in near future.
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You're right @ropaga
on top of that currently companies launching their ICOs do not need to care about price of their tokens. with STO it will be different, since noone would like to sell ownership to their own business for pennies. right?
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Good article, but even utility tokens will likely be treated like commodities by regulators, which means they'll be treated like investments. While they are utilitarian in nature and don't represent stake in a company, they can rise in value based on usage. For that reason, the CFTC is looking at them as commodities, much like gold or silver.
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Its quite fascinating how your view about Security Tokens tend to conform with mine and also contradict it at the same time.
I see Security Tokens as a saviour to the cryptosphere because with the pain recent ICOs have inflicted on major investors lately, the STOs seem to be a preferrable relief to it.
We've passed an age where investors will rely on luck and chance to bring them profits as the ICO has done. The investors needs a sense of ownership and that is what the STO brings.
With that said, I can gladly say in no time we'll all be saying RIP ICOs.
Thanks for this wonderful piece @creativeblue
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Thank you for your kind comment @mrrpiusz
You're absolutely right. I think more and more people are realizing that ICOs with current lack of regulations is a dead end.
I wonder how many ICOs will be still "standing" in a year time. Will Steem die as well? most likely it will :(
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I agree that security tokens have better future compared to utility tokens because security tokens provide ownership to the holder. But the question is as the cryptocurrencies are decentralized, won't someone own 51% security tokens and do whatever he likes? Are they safe?
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That is indeed a great question to ask @akdx.
With the traditional stock market risk is pretty much the same, isn't it?
I believe that this is the main reason why the price of STO will be more controlled comparing to ICOs. Right now all parties launching their ICOs do not have to be bothered with the value of their own tokens. With STO it will not be the case.
Thank you for your comment @akdx
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Congratulations to the @creativeblue team it's a pleasure to be able to read your articles again!
It is a very interesting topic
You have chosen a very valuable and worthy subject to be explored; again I congratulate you, wishing you the greatest of successes @creativeblue
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Thank you @nachomolina for your kind comment :)
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Good stuff, @focygray and @creativeblue. You have explained well the difference between the two tokens.
I think going forward we will see more of security tokens than utility ones. In fact, you can say that the utility tokens will still operate but strictly as security tokens - this is obvious from what is happening across the globe. Investors losing millions to fraud ICOs and regulatory bodies like the SEC of the USA taking a tough stance on the ICOs. If these are trends to go by, then we will very soon see physical trading principles being applied to the ICO world. That means security tokens are the best equivalents of the physical shares. Maybe, there will be further improvements to the concept of security tokens but that is the general direction in which the crypto-world will progress. And that is good news, to be honest!
So, thanks for sharing this article!
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Im glad @ooivas to learn that you've found this article helpful. @focygray indeed did such a great job preparing it.
I appreciate your valuable comment. Any idea if STEEM in a long run will be still working as a utility token or will they also be forced to follow strict regulations and become a security token?
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Upvoted and resteemed
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Appreciate it @qamal-roion-bot :)
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@creativeblue I loved the article. It is simple and still explaining the major Differences b/w ICO &Security tokens. Thanks, I didn't know it before.
So the question was is the future of ICO is Threatened by security tokens?
Yes maybe in future long-run security token may rise up and will have more control over blockchain. but May ICO will improve also to challenge the SecuritytToken. Who knows that. So Future is Full of possibilities. so be one of them.
Thank you,
Regards,
Dayyan Khan
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I think there will soon be a robot maid in each house (it's gonna be a household thing) and they're gonna sneak into our bedrooms and brutally murder us in our sleep.
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Hi @creativeblue. I realize that most traditional companies pay "dividends" to their stakeholders according with the legislation of the country in which they operate. In some jurisdictions these dividends are subject to taxation too. In the same way, I think every country will end up regulating these security tokens, probably with a tax for "security tokens dividends"
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However, everyone should check the taxes applicable in their country.
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You're completely right @danielfs. Personally Im looking forward to see some clear regulations with clear information about taxes.
my approach is simple: if we're paying taxes from making profit on something, then this "something" is pretty much legal. Which is what we need in crypto space.
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Time = capital; "Utility" to work
Money = $$$ (value of capital); "Security" of work
What is value-able but what can be made of the time?
Time to do or time for what is to be done is getting closer to the impact of money, but what is money if it cannot buy time?
The idea of money is monolithic as time itself. Though we cannot eat it, without it we cannot afford to eat, because with money, one gains access to account for grain.
Thank you @creativeblue for posting this!
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thank you for your great comment @craigahamilton :)
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Security and Utility tokens must have:
Substantial non-electronic assets, not all are electronic assets
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Thank you so much, for taking the time to reach out, help me and educate. I found this article to be insightful & informative and have responded with an upvote & re-steem! Thank you so much
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Appreciate your kind comment @lanceman and big thx for resteeming our post :)
Im glad you've found this article helpful. @focygray indeed did such a great job preparing it.
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Security token seems safe plus I like to stay away from tokens because i do not know how it actually works in the past i have joined electroneums startup i was supposed to recieved free coins but i did not recieve free coins/tokens thus making me distrustful to electroneum and other tokens/coins.
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Thank you for your kind comment.
And Im sorry to hear that you had such a bad experience so far @khussan
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no problems it's not like i invested much
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Thanks so much for this article, voted and resteemed.
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Appreciate your support @brad-saunders :)
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Your post had been curated by the @buildawhale team and mentioned here:
https://steemit.com/curation/@buildawhale/buildawhale-curation-digest-11-20-18
Keep up the good work and original content, everyone appreciates it!
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Excelente post. Muy explicativo. Y de seguro lograste aclarar a mas de uno, incluyéndome. Solo me queda una duda. Cuando aparece una nueva moneda, los publicadores tienen la obligación de notificar que tipo de token es o como lo reconozco si no hay información de ello? yo solo he invertido en bitcoin y dash. Mas seria interesante a mi gusto invertir en los tokens de seguridad. solo no se como reconocerlos. Gracias @creativeblue por tu buena informacioón.
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hi @tamaxadi
Any chance you could translate it to english and post english comment? :)
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Sorry, thanks.
Excellent post. Very explanatory. And surely you managed to clarify more than one, including me. When a new coin appears, the publishers have the obligation to notify that the type of token is how I recognize it and there is no information? I have only invested in bitcoin and dash. It would be more interesting for me to invest in security tokens. It will not be recognized. Thank you @creativeblue for your good information.
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This piece was so helpful.. Thanks alot @crypto.piotr for sharing and @creativeblue for the master piece
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Thanks for dropping by @desmoniac :)
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I think security tokens have a brighter future than utility tokens.
The challenge for people in the US is that SEC aggressively prosecutes entities that sell securities without a license. The laws surrounding securities force companies into selling securities through centrally controlled exchanges.
A security refers to an actual physical thing that has value. If one sells a security token in the United States; the SEC will swoop in and confiscate the security.
The cyberworld might be able to break the constraints of the SEC if two things happen. The first step is to create an open ledger that honestly and openly accounts for all the trades of a security.
With such an open ledger in hand, it would be possible to prove that crypto technology can do a better job than traditional exchanges.
The second challenge to making security tokens a success is to resist the calls for regulation.
People are already saying that the reason crypto has wild swings in price is because crypto lacks regulation.
The reason that the price of crypto swings so violently is because are no securities backing up the crypto.
Crypto is in a free fall because there are no securities that will kick in and buy the crypto. The only thing backing up STEEM is naive youthful exuberance. We are repeating the dot com bust which was held up simply by irrational exuberance.
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This is really a nice idea, a token for security purpose Wow.
Am so opting into this era of security token
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Blue👖
Posted using Partiko Android
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Thank you for the Support & Steem.
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It's excelent!
Very nice!
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I wish the Jamaica stock exchange had security tokens. I thought that's what Veratisium was gonna do. But it is so hard to Buy into Jamaican stocks unless you are in Jamaica or used to the old school system. So many good opportunities have passed me by.
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Interesting comment @dmilliz
Would you mind sharing with us what is approach towards crypto in Jamaica?
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Well like most of the world, most people don't understand it, many see it as a pozi scheme. But then there are the forward thinking few who especially work in the tourist industry and are giving tourists the option to pay in crypto.
I'm still trying to get my brothers on steemit ;)
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ICO's can't be stopped. I view it similar to how some governments try to stop online poker. There is just too much money in it for it to be stopped.
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I believe that crypto and blockchain cannot be stopped.
But ICO will most likely not encourage investors to put their money into existing projects as most of them will probably focus their investments on STO.
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Not many tokens are securities but the number is growing ! most of the existing security tokens are investment vehicles. Even Wozniak is backing a new security token that will invest in international real estate... The fact that these tokens are under the SEC regulation tend to make them more attractive as investors feel safer.
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Definition of utility tokens and security tokens are really really clear @creativeblue , people should be free to invest in whatever they want as long as their investment doesn't violate the law @crypto.piotr , people can say that the utility tokens will still operate but strictly as security tokens a 50% both- @focygray this is obvious from what is happening in a decentralize market and blockchain.... this is fascinating ... nobody knows what will happen on the future with kind of information ... and continuous learning ... thank you so much to all for this amazing post...
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Wow, I do nkt know how to commend your effort @focygray but I will say thank you for this items of information. Still coming around back to re-read though to get it all much more. Thanks too to you dea @crypto.piotr 😎
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I didn't know there was another kind of cryptocurrencies. And I can see some concerns about them in the comment.
Do you have an example of a security token?
Thank you for this interesting post.
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A very interesting article, so far I had no idea that there are differences in the crypto currencies. I find it difficult to get along in this field as a freshman. I am definitely interested investing in long term and not on short trading deals. Hope to read more from you guys!
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Yeah Upvoted.
A article which worth
Thanks for the information @creativeblue
I Understood the difference between both .
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At this point do we really need more tokens? I think this is kinda of over the market is saturated with it I think exchanges can milk a few extra % by having there own stable coin personally I think what Binance are doing is smart and with the current trade volumes they will need to convert a lot of btc or usdt to binance coin to burn it :)
Brave looks cool but how many people are really using crypto or just speculating?
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Hi, @Creativeblue!
This was new to me and thank your for sharing the knowledge. Is there an easy way to see what kind of token that is Utility tokens and sec token.
Do they all trade on the same market!
I have not invested in many diff. tokens but have joined a lot of airdrops and have a few diff. tokens I think most of them are utility tokens.
How can I if possible sort out sec, tokens on the market?
I have background from the stock market and hope that i have some understanding about companies... so for me I think investing in sec. tokens would be safest. Utl. tokens will be a bit more of a gamble they way I understand it!
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The massive drop of value of many ICO coins and rising even though slow of STO COIN is not connected to lack of interest of people but I will say it is government play and trick to control the CRYPTOcurrency.
Ok now mostly the Asia countries like Korea and China and USA is supporting the STO coin than ICO (I don't know the reasons but I think it is because the have power over them) Ico's blockchain s and Community is facing alot of security issues, hacking of the ICO blockchain and Community, aiming to reduce the users of ICO coins. I think the Government is behind it. Ok now, have you thought of this that any STO coin is equivalent to US DOLLAR value and you hardly see any STO higher than US dollar (prove me wrong if not true ).
Thanks for this lovely post
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This is a good breakthrough in the world of blockchain and cryptocurrency ...
This is very brilliant with the presence of security tokens, I was fascinated by the complete ownership of each shareholder.
Thank you for sharing ...
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STOs were the way to go since the beginning. Would have avoided the frauds and the scams.
I think many of the already issued ICO tokens will be turned into Security Tokens, which will make them more valuable as they will offer more protections to investors than "naked" ICOs.
Just an opinion and not trading advice.
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Future of ICO is precisely threatened by STO (Security Token offerings). but I believe it is for good. ICO running without any regulation collected million of dollars and then exited. Investor losing money due to failed business is acceptable but investor losing money because somebody run away with that money is not at all acceptable. STO is demand of time.
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it is a very broad and interesting subject, no doubt! :)
there are Utility tokens as BNB, Binance's token used there for paying fees on transactions. it is successful I would say. perhaps there are some other too, which I am not very familiar with.
while there are also sort of Security tokens...
as many has already pointed out in comments here before me, Security tokens raise a lot of questions and doubts. because Securities are strictly regulated and watched by gov entities such as SEC etc. there are rigid rules and laws. Investors / Stakeholders in traditional business require certain guarantees and protection, provided by law and all those regulations. otherwise it is very unlikely that someone would venture into some investments (i.e. buy stakes) with such a high risk. especially institutional investors.
at the same time, there is no yet any laws which are about Crypto!
all those existing laws are about Fiat money.
that makes it complicated and confusing even for gov agencies and law firms. what to speak of average investors.
take STEEM for example! it is from one hand can be considered as kind of Utility token: since it is been used in various operations and transactions here on Steemit and many other Apps. also it is a liquid tradable token which can speculate on exchanges. at the same time, in its "illiquid" form (aka "Non-Fungible") as Steem Power - it is de facto a Security Token. also at the same time Steem Power is not a Cryptocurrency :)
however STEEM token is a Cyrptocurrency, and it is being used to Invest or Stake into this Venture, as unit of Investment Capital albeit in cryptocurrency - nevertheless it IS an investment. so, yes, it is "Powered Up" first - in other words "Locked-up" or "frozen" (or Lend into System). and while it is being kept in the System - it is not moved (supposedly), thus becoming "Steem Power". which by the way - gives a dividends on Investment! in fact ONLY "Powered Up" STEEM coins can give the profit interest here - not the liquid STEEM! i.e. if one just keeps STEEM coins in one's wallet (not Powered Up) - those coins will NOT give any interest at all. so, in this regard each and every 1 "Powered Up" unit of STEEM coin (aka "Steem Power") is de facto a STAKE unit of the Capital into this Ecosystem! and each person who has some STEEM coins "Powered Up" in here - is de facto a Stakeholder. yet at the same time ... there is no any formal agreement between the Corporation and Stakeholder; there are no any guarantees; there is no any protection; while there are certain risks...
so, it is a HUGE subject! :)
but yes, the way all Crypto and in fact whole global financial system goes - it looks like more and more Companies and perhaps quite soon giant Corporations will start making their own tokens. and most likely majority of them would be precisely such Security Tokens. although some might be also as Utility tokens. some even express the opinions that soon enough ALL the Crypto will seize to exist (or become banned) and instead will be only those Corporate Tokens.
and .... government issued "crypto-fiat" :)
or CBDCs and / or "stablecoins", which has already started to emerge...
BTW perhaps such stablecoins can consider as Utility tokens. :)
but of course, a lot of questions and uncertainties still remain ...
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In my opinion if security tokens have to be backed by an asset of somesort and given the current markets this would possibly limit the current distribution, personally I don't see large companies putting forward any securities anytime soon if they are observing the bullish market. What possibly is more likely is new startups building on the token they create, but these are just my own thoughts.
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It is indeed a very helpful post for understanding about two different types of token.I have seen the launch of tons of ICO and token this year.But I don't understand why people should buy their tokens.
I mean most of the ICO or Token launch doesn't seem very promising to me.I don't know how long this token business should sustain.Many people invest their money for buying tokens and then they fail to make a profit out of it.Sometimes they also lose their investment instead of gaining anything.
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Just a small observation…
If we define Security and Utility tokens like this:
…then Bitcoin would go into Utility category, despite it is the best Security you can imagine. On the other side, defining Security tokens like this:
…makes them just as fraudulent as fiat money, imposing a mediator again.
Those definitions are due for a major overhaul :)
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Nice Article regarding Token & Security Token..
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very valuble article.
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Thank you so much for sharing this with us! Have a great day!
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Article full of information for us! Upvoted and Resteemed!
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Thank you for this interesting post :D I will upvote and resteem.
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Nice write up. This post makes a bit things easy to understand :)
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You got a 17.86% upvote from @upmewhale courtesy of @crypto.piotr!
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I would agree that security tokens are long term investments.
I believe the wrinkle will be dApps.
Also, not certain how these will look in the years to come, but certainly nothing like Google Play or the Apple Store.
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Very interesting article, and wonderfully explained. The issue on the horizon is that the crypto market has been, and is being flooded. In order for cyrpto to advance we need the majority of the population, or at least a vast segment to adopt the tech, and when the market continues to saturate it will (from my perspective) lead the average person to stay away from cyrpto even more. Security Tokens seem to be a way to protect your investment in a company, and could perhaps hold more value in the long term.
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