There is no doubt that blockchain technology has the potential to drive major changes in almost all existing industries. It enables a huge number of new business models. Blockchain has brought useful innovations such as decentralization. One important factor that has contributed to the success of this technology is the use of Security and Utility tokens.

Today, utility tokens and tokenized securities are million-dollar concepts that startups around the world use in the crowdfunding process. But what do these terms mean? What is the difference between a utility token and a security token? Let’s take a closer look at these two concepts.

What is a token?

A token is a utility or asset issued by an enterprise. Often tokens are issued when a company launches an initial coin offering (ICO), which works almost like an initial public offering (IPO).

The difference between an ICO and an IPO is that in an IPO, users receive shares in exchange for the investment they make, while in an ICO they receive a token in exchange for their investment. There are two main types of tokens that can be found in the ICO space:

  • Utility tokens (Utilitarian or utility tokens);
  • Security tokens (Investment tokens or security tokens).

There is often confusion in determining the differences between security tokens and utility tokens. We will try to break down the difference between these two terms.

Utility Token

Utility or utility tokens are application coins or user tokens. They provide future access to products or services offered by a company. Hence, utility tokens are not created for investment.

Just as an electronics dealer can take orders for a video game that will be released in a few months, a project can create service tokens and sell digital coupons for services or products while they are still in development.

A good example is Filecoin, which raised $257 million dollars through token sales. These will allow users to access its decentralized cloud storage platform. Another example is also ERC20 in the Ethereum ecosystem.

Security Token

Security tokens are a digital asset whose value is determined by an externally traded asset. Consequently, these tokens are subject to federal laws and securities regulations. Failure to comply with these regulations can lead to serious consequences, including fines and potential disruption of project development.

On the other hand, security tokens can offer a wide range of applications if the project complies with all regulatory requirements. The most promising of these features is the ability to offer tokens as a digital representation of a company’s stock.

For example, Overstock recently announced that tZERO, one of its portfolio companies, will hold an ICO to fund the creation of a licensed security token trading platform. The tZERO tokens will be issued in accordance with SEC rules.

Key differences

The key difference between security tokens and utility tokens is the intended use and functionality. Security tokens are created as investments. Holders are paid dividends in the form of additional coins each time the token company makes a profit in the market.

Users who hold a security token also gain ownership of the company. Blockchain offers a platform that can be used to create a voting system. It allows investors to control the decision-making process of the company.

On the other hand, service tokens are not designed for their holders to control decision-making in a company. They simply allow users to interact with the company’s services. Both securities and service tokens can increase in value if the market rates rise.