Security token vs Utility token – Key differences to know

Security Vs Utility tokens
Security Vs Utility tokens


In this modern era, blockchain technology has been an immaculate revolution among several different sectors. From the advent of blockchain technology, cryptocurrencies, and crypto tokens have also become quite familiar among common people across the globe. This is mainly because blockchain technology has been used as an online distributed ledger technology that is used for recording and tracking crypto transactions. The use of Blockchain technology takes place in almost all places where digital currencies are involved. Let us look into Security Token Vs Utility Token.

Speaking of the cryptocurrencies’ impact on the financial sector, crowdfunding has also been revolutionized by virtual currencies on a large scale. Emerging entrepreneurs nowadays are making use of crypto crowdfunding for rising capital funds for their project development. These entrepreneurs give out crypto tokens in exchange for the investment received. One can use these tokens for experiencing some of the exclusive services offered by the company. The most common type of tokens offered by the fundraising company will come down to Security tokens vs Utility tokens. However, we will see in detail about the basics of Security vs Utility token. 

What are Security tokens?

Security tokens are common digital assets from which we can derive from an external asset. The security tokens are very much subject to the local government’s regulations. The design of security tokens is absolutely necessary to comply with these regulations. In case if the built tokens are not within those regulations, then severe penalties would be imposed upon the development of the project. 

Security tokens depict assets that are taken as participations in real physical underlying revenue streams, and ventures and they are entitled to interest dividends. When talking in terms of economic function, the Security tokens are the same as bonds, derivatives, and also equities. The basis of security token development is only for increasing the trust of the investors. They are used for authenticating identities digitally by storing personal information. Security tokens can also be used as an alternative to a password for proving an owner’s identity.

How do Security tokens work?

Security Token Offering is a quite popular method among entrepreneurs to distribute tokens to investors which is more or less similar to an ICO. It shares the same trait in terms of gains, interest-paying, dividend settlement, and investing in versatile properties. They are vastly subjected to capital as well as financial market legislation which is held by the SEC itself. This is mainly because they offer multiple privileges and perform very tightly with other financial institutions.

Security tokens are commonly known for their pace and reliability over blockchain technologies. However, they also have the advantage of quite tight gripped government legislative regulations which prohibits any and all sorts of malicious activities. As far as the working part is concerned, if there is an expectation of benefitting one token from the actions of another, the subject token is regarded as a defense. 

The entities entering into the crowdfunding would have to submit the investment contracts way earlier to their crowdfund offering(STO). Moreover, the submitted contracts should reflect the possession of a digital asset that is similar to a financial instrument in a lawful manner. Having said all this, the creation of security tokens will involve some kind of technical nuances.

How to create Security tokens?

Security token creation is pretty much straightforward since there is an involvement of local authorities. In that regard, security token development is most commonly in two very popular ways. They are:

Asset tokenization

 This is the process where a traditional or conventional financially bound asset that does not exist on a blockchain is represented virtually through tokenizing. An ideal example of that would be the establishment of a real-estate agency that has created virtual tokens for representing shares or properties digitally. 

Asset origination

 This would be very appropriate for financial assets which already have an on-chain presence. For that type of financial asset tokens development using asset origination. As such created assets are commonly referred to as “natively digital securities”. These natively digital securities can be created through mining or staking, depending upon the underlying blockchain technology. 

These are some of the ways for Security token development.  Even though there is an abundance of security protections in security tokens. There is some volume of demand for utility tokens also. Let us see about that in a detailed manner. 

What are Utility tokens?

Utility tokens can be deemed as application coins or as user tokens. These types of tokens are normally given out in the process of crowdfunding as a project is on its way to execute an Initial coin offering(ICO). When a company sets off to create a utility token, it is very clear that the company is creating a unique form of digital giveaway coupons which are redeemable in the future. These created coupons will be available at a discounted fee or through special access to a product or service. 

As oppose of security tokens, utility tokens are not in use for investment purposes because they can be exempted from certain federal regulations. These regulations are nothing but governing securities when they are properly set up. Utility tokens are an excellent option for gaining substantial profits and acquiring finances for freshly developing projects. 

Roles of Utility tokens

Utility tokens became quite popular with the rise of Initial Coin Offering. And this is mainly because of the overwhelming use of the utility token mechanisms in numerous scenarios. Some of the vital roles played by utility tokens in the world of crowdfunding are:

  • The owner of the utility token has numerous rights that also include the right to utilize a product or even to own one. In addition to that, utility tokens provide the owner with the right to pitch or even vote for specific cases as well as topics.
  • Possession of utility tokens will provide the owner with the advantage of exercising decentralized storage. These tokens also provide the exchange value for the services they provide. 
  • Utility tokens tend to improve the user experience by providing rewards for numerous things.
  • Utility tokens, at times, act as digital currency in the blockchain. In addition to that, it can be a fitting alternative for financial payments in the forthcoming years. 
  • Utility tokens provide the users with the possibility of sharing them in exchange for earning some peculiar rewards.
  • The users who are often using the tolling system can enter the blockchain ecosystem or even the decentralized services by using utility tokens.

The above are some of the key roles of  Utility tokens. They are capable of performing very efficiently in several circumstances. Having seen the basics of Utility and security tokens, let us further discuss the major differences between the two established tokens.

Security tokens Vs Utility tokens

When it comes to the fundamental or basic differences between Security tokens vs Utility tokens, both token types can be distinguished by a substantial amount of differences. Let us examine them in a detailed manner. 

Utility token
Security token
A basic Utility token is never pegged with any type of external asset or a real-time asset.  A security token is entirely referred to or pegged with important assets like commodities, bonds, real estate, etc. 
The development of Utility tokens are under an existing blockchain like Tron, Ethereum, Binance smart chain, etc.  The development of Security tokens is also mostly under an existing blockchain, but in addition to that, it must also adhere to the SEC regulations as well as guidelines.
Utility tokens serve as a unique utility like utilization over a platform for redeeming a service. Security tokens represent investment contracts obliging to legal ownership of virtual assets which have been verified within the blockchain.
The values of utility tokens do not relate to the present status of the company valuation. In security tokens, the token value directly correlates with the company value upon which the tokens are.
The lack of regulation makes it prone to cyber threats. The chance of malicious activities is very minimal as the tokens are secure with a considerable amount of regulations.
Currently, the regulation of crypto tokens provides very little consensus.  The potential investors as well as the company have to obey entirely with the Howey test.
Utility tokens have infinite access to utility as well as protocols. Security tokens provide ownership assets.
Utility tokens do not guarantee sufficient profits for buyers. Security tokens generally come with a substantial amount of profit expectation.

In the aftermath of the comparison of Security vs Utility token, you might have come to clarity about the basic working and understanding of these two tokens. In addition to developing a suitable token for your business, it is also very important to hand over the reins to the fitting token development service provider. 

Final thoughts

In the end, From the above-furnished information, we have learned about the basic as well as the ultimate differences between the two classes of common tokens, Utility tokens, and Security tokens. The wide use of both these token standards in crowdfunding campaigns. However, the specified use cases bring a telling difference in both these token standards. 

Having said all this, creating either of these token standards would require a substantial amount of software skills if you wish to pull it off perfectly. In that regard, if you want to accomplish the creation part in a seamless manner, seeking professional guidance would be the ideal option. We, at Zab technologies, offer token creation services of all kinds. We are a team of elite software professionals who are working as an STO development company. Our immaculate track record and clients review are telling examples of our stellar work over the years. Having us in your corner would provide you with a technical edge over your competitors.

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