The difference between Security Tokens and Utility Tokens?


If you are reading this article, then chances are you either currently own some cryptocurrency or you might be planning of doing so in a near future. As an investor, it is important to understand the implications of owning tokens issued from blockchain projects.

A very increasingly popular way for projects to raise funds for their activities is through ICOs. Through the process, these projects can issue different types of tokens to investors in exchange for money. The major ones issued by these companies are Utility and Security tokens.

Utility tokens are provided by the company during a sale and have the sole purpose of being used on the company’s products and services. In other words, utility tokens are not investments, even if it’s value can appreciate as demand for the company’s product and service increases.

Meanwhile, Security tokens derive their value from a company’s asset and are subject to federal regulations. They are bridging the gap between the financial sector and blockchain technology. They represent shares or ownership of a company and any project not abiding by regulations when issuing security tokens are subject to costly penalties which may hinder project development.

As an investor, the risk of owning a security token is tied to the company’s false promises of delivering returns on initial investment and not abiding by federal securities regulations. If a company is found in breach of these regulations, then the value of the token might become worthless. However, if a company is abiding by regulations, then there is actual potential for token holders to see returns on their investment. The same applies for utility tokens, as their value is only worth as much as the demand for the product and service of the company. If the company fails in delivering any substantial product or service that has a true use case, then the token might be as good as worthless.

In the long-term, if blockchain technology proves to have a real-world use case, then cryptocurrency will be here to stay and owning either type of tokens can be very beneficial.

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