When looking to launch a cryptocurrency, there are several important decisions to make. Possibly one of the most important is whether the currency (known as a token) will be utility or security-based.
What’s the Difference?
In short, a utility token is one that grants the user access to something. Whether it’s part of a website or services, it’s generally directly exchanged for whatever it is you’re selling. It can change hands and increase in value on the market, but it’s currency much in the way game tickets are at an arcade. Investors usually want it for the utility it provides, rather than its monetary value.
A security token, on the other hand, acts much more like a stock without giving up shares in your company. They’re traded for money, they’re tied to the value of your company and generally, investors want to see them increase in value. The desire to own it is tied directly to how much it’s worth.
This one’s tricky. In the US, the SEC hasn’t fully caught up with the realities of cryptocurrencies, however, they are starting to crack down on them.
In general, if you’re offering a security token, you’re better off following the same laws and rules that govern the stock market and stock trading. If you don’t, you may find yourself in a whole load of trouble.
That doesn’t mean you’re off the hook with a utility token, however. If you’re marketing it incorrectly, the SEC (or relevant governing body) may still consider it a security and enforce the same rules as above.
Which is Better?
Honestly, there’s no right answer here. Depending on what your offering and how your company works, one may not work at all. You should take a closer look at your offerings as well as the legalities surrounding each.
Cryptocurrencies are becoming more and more popular as ways to raise funds and make money, and cryptocurrency investors are always looking for the next big thing to invest in. That being said, you need to be careful and consult with a lawyer (or two!) about how to navigate the changing landscape of the laws.
For some further reading, check out these other related articles:
- ICO 101: Utility Tokens vs. Security Tokens – StrategicCoin.com
- Understanding the difference between coins, utility tokens and tokenized securities – Medium.com
- ICO basics – security tokens vs. utility tokens – CoinIntelligence.com