How cryptocurrency, utility, and security tokens work

29.07.2020

It still can be hard for many people to differentiate tokens and their functions. It can be confusing since the whole concept is still relatively new. Let’s try to understand the differences between all of them and make a short summary.

Blockchain is the base

Firstly, it is impossible to understand how tokens actually work without learning about their connections, that form the blockchain. The inscription on the blockchain record determines the type of the token, whether it is utility, security, or cryptocurrency.

For cryptocurrencies, the statements on the record would be similar to “Jack has 10 bitcoins” or “Anna transferred 2 bitcoins to Jack”.

When it comes to utility tokens, startups use them often to raise money. The process of their usage starts with providing startups with money by purchasing their tokens. Later, you receive special rights to use the company’s product. Companies usually offer utility tokens during Initial Coins Offerings (ICOs). The inscription for utility tokens would be, for example, “Jack has the right to use product X” or “Jack has the right to 5 devices from a company X”.

As for security tokens, their blockchain record says “Jack owns 2% of an asset X”. As asset X we can consider a piece of real estate or art, maybe a company, etc. However, in practice, security tokens mostly are used for the ownership of companies or real estate. For companies, security tokens represent shares and give additional rights gained with ownership. These additional privileges can be a voting right or a right for dividends. In the case of real estate, it is a right on receiving a part of the profit from renting. Generally, investing in security tokens can be quite similar to traditional shares investments. Yet, security tokens are known to be very liquid, have automated compliance, and have many more advantages. Just as ICO for utility tokens or IPO for traditional shares, security tokens offering (STO) is used for security tokens.

Legal status differences

The earlier mentioned distinguish is a starting point for all other differences like being diverse in the legal sense, too. In most jurisdictions, cryptocurrencies have a status of currencies. The US considers security tokens securities, and it is their unique advantage. That is why investors in security tokens are protected according to all relevant regulations. But utility tokens’ legal status is not defined.

Despite many investors losing money by investing in fraudulent ICOs, the demand for more liquid investment is still growing. It is also an easier path for companies to raise funds. Nowadays companies massively issue security tokens and many people invest in them. The reason for that is the fact that security tokens allow people to satisfy their investment demand in a way that complies with all legal requirements.

Naturally, the scene of cryptocurrencies is becoming more known and popular. Still, the innovations in the fintech sphere do not cease to develop and produce new trends and terminology.

For more information on the legal framework for using and issuing tokens, contact COREDO. We provide our clients with legal support, individual consultations through the whole process of registering a company with the ICO.

LEAVE AN APPLICATION AND GET
A FREE CONSULTATION