What are Security and Utility tokens and what is their difference

Beginners often can not understand what is different from the classic cryptocurrency tokens issued by companies, as well as what tokens are.

In recent news, we reported that the securities Commission USA (SEC) has sent numerous requests to the company which were held by ICO. Many, without dealing with the issue, regarded it as an attack on the world of blockchain and cryptocurrency. It also had a negative impact on the cryptocurrency exchange rate: on the days when there was news about SEC, the market was marked by a negative.

But is the sec Commission really up against the cryptocurrency or is it just trying to clean up this nascent market where the laws of the “wild West”reign at the moment? That’s what we will understand in this article

Cryptocurrency and tokens-the difference
Cryptocurrency called means of payment, the creation and use of which is based on cryptographic protocols. Cryptocurrency works on the basis of blockchain technology, which is a chain of blocks, the data in which it is impossible to fake or change. The database of transactions and purses is stored by the network participants. Any single server does not exist.

Tokens are called the currency issued by the company. They are produced centrally, without mining. Before the ICO, the startup issues a number of tokens for its needs. Investors interested in the project can invest in these tokens. Information about the investment in the project will be recorded in the blockchain and protected by a cryptographic Protocol. In this sense, coins and tokens are similar.

What is still wrong with tokens and why they attracted the attention of the SEC. The fact is that there are several types of tokens

токен и криптовалюта

Types of tokens
There are two types of tokens

“Utility” (useful) token – coin, the internal digital currency of the company, the purchase of which provides some advantages when using the products of this company. I. e., the investment is necessary to simplify the use of the service, or it is just the conditions of this product. The simplest example NOT of the world, the blockchain can serve as an internal game currency.

“Security” (investment) token – a digital asset that is acquired for the purpose of profit in the future.

The difference Security and Utility
The SEC Commission decided in 2017 that Security tokens fall under the regulation applicable to standard shares, i.e. the issuance of tokens should be accompanied by their mandatory registration.

Howie, there is a test by which you can verify yourself what type of token purchased. If in all questions the answer is “Yes” – then you buy a security token

The purchaser of the token is waiting to receive the income?
Is the main function an attachment?
The holder of the token receives income from a third party?
The money from the sale of the asset invested in the company?

In turn, utility tokens are purchased exclusively for internal payments, exchange between users, payment for the provided functionality, and so on. That is, users do not try to get any profit from the sale of these tokens.

Why the SEC matters to the ICO
After you have received guidance from the SEC of the exchange restrict the purchase of tokens. This is due to the fact that in the future there may be negative legislative norms regarding security tokens or at least questions regarding companies that have issued these tokens

This is what happened not so long ago, because security tokens must be officially registered, while there are still no registered ICOS in the SEC.

The companies organizing the ICO, in turn, have found themselves in a difficult position when their token is essentially a utility, but for a large investment they claim it as security. That is, investors who may not even use the product/service of this company will purchase a token only for further resale on the exchange.

On the other hand, ICO companies indicate that any utility token can also be exchanged between users for real money, but, however, it will no longer be a transaction through the exchange.

In any case, the SEC Commission questions are quite reasonable and we believe that in the future this will lead to some order in this market. After all, only in 2017 there were too many failed and frankly fraudulent ICOS, and we think this will be able to protect users from investing in dangerous projects.

I would like to note that not all projects want to release their tokens were recognized as security, because it obliges them to register as issuers and to pay taxes.

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