Governments all around the world are looking to clamp down or at least add some order in the burgeoning market of Initial Coin Offerings (ICOs). Whereas some of these projects are legit, there are those that appear shady — or may be structured in a way that is not permitted by regulatory agencies such as the U.S. Securities and Exchange Commission (SEC).
Related to that, it is worth knowing that there are two kinds of crypto tokens, utility and security tokens, which we’ll discuss in this article. Let’s start with…
Security tokens are crypto tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders. In a way, they act like securities — bonds or stocks — and as such are a subject to regulation.
That being said, this sort of token isn’t necessarily illegal; it is perfectly legit as long as it’s compliant with requirements issued by regulatory bodies.
And this is where the trouble begins for some ICOs, namely those that are selling security tokens without registering their offerings — and preparing all other paperwork — with the SEC or other regulatory body in the country where the company plans to launch an ICO.
To put it differently, companies looking to launch an ICO in the U.S. need to abide by the rules of SEC.
Two good examples of properly launched security tokens are Overstock-affiliated tZERO and Polymath.
On the other hand, we have utility tokens which could be considered app coins or app tokens, as their use is limited to a single decentralized app/service. Mind you, that service could be big enough that you don’t need to use these tokens elsewhere. Or, you can exchange them for other cryptocurrencies or cash out your holdings.
That being said, we should add that utility tokens could change their valuation/price, but should not be considered securities.
Again we have two good examples for utility tokens: Filecoin and Sia.
The difference between Security and Utility tokens
As you may have concluded for yourself, security tokens are designed to act as securities and could bring profits to its holders. In contrast, utility tokens are made to serve within the limits of a certain decentralized application (Dapp), and they too bring benefits and/or savings to their owners. Both kinds of tokens have their place in the market.
The conclusion is: when buying into a new token, it is important to know what you’re getting into. If it’s a security token, you will want to know that it is properly registered with the regulatory agencies. Otherwise, you may want to skip on it.
As for utility tokens, you’ll want to consider whether the underlying app is something you need. If the answer is no – perhaps you’re better off spending your money elsewhere.