The recent skyrocketing price of BTC and other crypto assets has termed Blockchain one of the fastest-growing technologies in recent history. However, its decentralized execution model is famous beyond the cryptocurrency markets and is being adopted by industries far and wide. Blockchain technology and the BTC cryptocurrency are both now over a decade old. And its decentralized model has proven to be a bane for centralized finance.
Of the sizable $40 trillion valuations of the financial services industry and the investment market, cryptocurrency has taken a sizable chunk out of it and has become worth over $3 billion.
At the advent of Bitcoin, the sole purpose of cryptocurrency was just that: a currency. But the blockchain platform and the utility of the technology have found many novel applications. First came the craze of initial coin offerings (ICOs), creating thousands of different cryptocurrencies that were introduced, which are commonly referred to as ‘tokens’.
The year 2021 might be the year that signals the rise of yet another kind of token through a process called an STO or security token offering. An STO may feature a cryptocurrency backed by gold and silver. It could be backed by other tangible assets such as real estate or another valuable commodity like oil.
Utility Tokens vs. Security Tokens
As cryptocurrency has become a well-known concept and a catch-all phrase to mean any payment transferrable via Blockchain, there is little knowledge to discern a currency from a token.
Unlike a cryptocurrency, a utility token derives its value both via the ICO when the token is initially sold or earn it for providing a valued input into the overall ecosystem of that particular token. Its value has no intrinsic way to be measured and often is valued in terms of BTC, Ethereum, or other cryptocurrencies.
For example, a utility token called Golem allows users to lend their own PC’s power to the network, and in return, users can earn golem network tokens or GNTs. Another utility token called the Basic Attention Token, or BAT, works in a similar way that rewards users with BAT for using the BRAVE browser and viewing ads.
As discussed above, the interesting part is that these tokens amount to little more than the loyalty rewards points. In some cases, these points are often rewarded via credit cards but are only signatory placeholders with limited utility for the platform in question to work. The value attached to them is trivial at worst and ambiguous at best since the crypto market pretends that the underlying business has a sound value proportion that makes its tokens more valuable.
However, projects like those depicted above evolve rapidly, gaining new partners and users constantly. But, it is known that their tokens are still valued in relation to Bitcoin and the market.
To clarify the difference, it is essential to realize that users who deal with utility tokens can only be described as purchasers of service, not investors in a venture. The ICO and their contribution to the crowdsale are simply purchasing the ability to use the service itself and nothing more.
Of course, you may argue and say, “Well, what is a stablecoin then?” But, that is a separate discussion altogether. They are tokens that are pegged to something of value like a globally stable fiat currency or valuable commodities like gold and silver.
Security tokens, on the other hand, represent denominating fractional ownership.
Be it the ownership of a tangible asset or security; a security token represents an investment idea that is naturally more structured. It also assumes that the investors can expect that their fractional ownership share is preserved on the blockchain ledger somewhere.
Security tokens also represent the natural bridge between the traditional finance sector and Blockchain. And provide a way to preserve the concepts of investment in the former. It is also easier to envision because the assets divvied up via tokens are already in existence in the traditional market. It aims to facilitate the most important markets like equities (either public or private equity) and real estate.
In more of a reversal of former blockchain projects that directly undercut the old ICO model, many projects are now tokenizing equity rights for pre-IPO companies.
The part that has kept the utility token economy dependant on BTC for valuation is the lack of regulation. Not having to be held accountable has meant that utility tokens can circumvent institutional finance alongside the costs and accountability involved. At the same time, the constant volatility of the cryptocurrency market has made it riskier serious endeavors to launch an ICO and plan a timeline with conditions stable enough to run a company.
The result is that many crypto projects cash out immediately to maintain solvency. This has rendered the utility token to be no more than either a gamble or a service purchase rather than an actual investment.
There are many innovative ideas born of crypto companies. But, the notorious lack of accountability means it takes longer to go public than it used to. Many investors can’t avail of their equity rights for as long as ten years.
In contrast, the security tokens are more stringently scrutinized by regulatory authorities such as the U.S. Securities and Exchange Commission. Before an STO, each token requires a full SEC approval to be sold to the public. Even when it is sold to non-accredited investors or traded on secondary exchanges, a security token has to mind its Ps and Qs. Regulatory requirements may have been one of the reasons why the growth and adoption of security tokens have been lackluster.
In conclusion, while the utility token is essentially dependant on the BTC for its value and seldom has the fundamental value proposition of its business model, the security token is often a well-regulated, transparent, and professionally managed investment with tangible assets behind it.