Differences between Utility and Security tokens

Tokens are an integral part of blockchain technology and their capacity is practically infinite. However, there are marked differences between their types and in order to clarify them, this article will expose the differences, advantages and disadvantages of utility and security tokens.

LThe utility and security tokens are two of the tools that we most often see in the world of cryptocurrencies. And it is not for less, since both allow these projects to access the initial or intermediate financing necessary for their development and evolution. But to understand a little more about these tools, let's learn a little more about what each one of them are and the differences between them.

What is a Utility Token?

On a previous occasion we have talked to you about utility tokens or utility tokens. These tokens are actually, the result of the creation of a coupon by a company. This coupon or token can be exchanged in the future for access to the services that said company provides or will provide.

Utility tokens are normally used as a way to obtain financing to a project in development or to be developed. For this reason, utility tokens are often filled with a lot of speculation and unrealistic development expectations. Despite this, utility tokens are usually a highly sought-after means of financing, especially in community projects such as that of the cryptocurrencies, o block chains.

What is a Security Token?

On the other side we have the security tokens or security token. These tokens they are a kind of digital asset that bears a great similarity to the well-known stocks. And it is that the value of a security token comes from a tangible asset that can be traded and that is fully regulated. Because these tokens fall under asset regulation, the companies that issue them must present all the documentation and guarantees of the same. This has made them today a safe form of investment and financing for projects based on blockchain technology.

Differences between Utility and Security Tokens

Now they will surely wonder, Why two types of tokens?. But more importantly, What differentiates them?. The truth is that both tokens have marked differences and each one of them presents unique characteristics, let's begin to examine them:

These are some of the most marked differences between utility and security tokens. It is clear that security tokens provide greater security and a number of important advantages. But their difficulty in issuance has kept them somewhat away from the world of cryptocurrencies so far. This is unlike utility tokens, whose use in ICOs during 2017-2018 was highly explosive. This despite all the shocks and malicious actions and scams that took place in that period.

But now you ask yourself: How do I know that I am facing a utility or security token?.

Howey's test. Differentiating utility and security tokens

The way to recognize what and what is not a security is thanks to the use of the Howey test. This test was created in 1946 in the middle of a legal process between the SEC and Howey Company. This judicial process gave rise to the Howey Test, with which the SEC has since conducted a study on what is or is not a security.

Howey's Test is divided into the following points:

1. There is an investment of money.
2. There is an expectation of profit.
3. The investment of money is in a common company.
4. Any profit comes from the efforts of a promoter or a third party.

If any transaction meets these four criteria then it is considered a security. This is the simple test that allows you to recognize the differences between a utility and a security token.

Utility and security tokens within ICOs

Surely you have ever heard of the Initial Coin Offering (ICO for its acronym in English). Well, these activities were very fashionable in the world of cryptocurrencies thanks to Ethereum. The objective of this activity was to allow recent companies to obtain financing for their different and nascent projects.

To achieve this, the companies used the utility tokens in order to access investments and guarantee said investors access to the platform once it was built. With this, the company guaranteed access to the monetary resource and kept all the company's assets under its control. In all this activity, the only thing that supported this fact was the confidence of the investors that the developers would fulfill their promises.

Sadly, not all cases were like this and there were many cases of scams. It was clear that the figure of utility tokens did not provide the necessary security for a business that was often multimillionaire. All this led to the need to change the business model while guaranteeing transparency and decentralization at the blockchain level.

To solve this problem, the scheme changed to utility tokens, creating two new forms of financing. The first in the form of Security Tokens Offer (HUNDRED) and Equity Tokens Offer (ETO). These two forms of financing must comply with regulatory requirements and are in effect a safer form of investment for both the company and investors. It is the appropriate and necessary answer to adapt the growing crypto economy to the needs of transparent and secure business for all.