Different types of cryptocurrencies exist in the blockchain space based on their fundamentals, purpose, use cases, and other factors. The two most popular types of them are security tokens and utility tokens. And, they make it difficult for beginners to wrap their heads around them.

The main difference between security tokens and utility tokens is that security tokens represent traditional assets and utility tokens have specific use cases in a particular blockchain project. We will learn more differences between security tokens and utility tokens in this article.

Security Tokens and Utility Tokens in Brief

Security tokens are a type of cryptocurrencies that represent assets like stocks, bonds, equities, or commodities, etc. They derive value from the underlying assets and enable ownership transfer. Crypto security tokens are subjected to the rules and regulations similar to traditional securities. Thus, they comply with the US SEC guidelines. The fundraising events involving security tokens are called Security Token Offerings (STOs).

Utility tokens are developed keeping specific use cases in mind. They provide access to products and services of a specific platform. Utility tokens are like digital coupons that holders can redeem to get exclusive access to the platform’s features and offerings. The fundraising events that involve utility tokens are called Initial Coin Offerings (ICOs) or presales.

Security Tokens Vs Utility Tokens: 5 Key Differences

Purpose of the Token

Security tokens represent ownership of a real world asset like shares of company, real estate, commodities, etc. They are also called real world assets or RWA tokens when they represent tangible traditional assets. The main purpose of creating security tokens is to facilitate and simplify investment of traditional assets.

The purpose of utility tokens is to access products, services, and other offerings of a crypto platform. Utility token holders use them to play blockchain games, purchase digital goods and services on virtual platforms, or interact with decentralized applications (dApps) in other ways.

Investment and Ownership

When you invest in security tokens, you will get ownership of its underlying asset. You are entitled to all the rights and benefits associated with that ownership. Unlike traditional methods of investment, security tokens democratize investment and open doors for large scale investments with no geographical barriers.

In the case of utility token investment, you will not get any kind of ownership of the company or platform that issues those tokens. You simply purchase utility tokens and as we mentioned above, you can use them to access the platform features and offerings.

Regulation

Since security tokens represent traditional securities, they are subjected to the rules and regulations imposed by the US SEC. They must comply with these guidelines to ensure smooth launching of the project and issuing of tokens. Registering the tokens with the SEC and providing detailed information about the token offering to investors are part of these guidelines.

Unlike security tokens, utility tokens are not subjected to any kind of stringent rules and regulations. But, users must comply with the rules of the platforms such as following KYC and AML guidelines.

Market Performance

Security tokens and utility tokens differ based on their market performance as well. When we compare the two, security tokens are more stable than utility tokens. Because security tokens company shares or real world assets. However, they can be volatile based on the price changes of their underlying assets.

Utility tokens are more volatile as they are not backed by assets. Their market performance purely depends on the supply and demand of the platform associated with them. When the adoption of the platform increases, demand increases, so does the price, and vice versa.

Type of Investors

Security tokens are more attractive to the accredited investors who are looking to gain returns in the long run. Since these tokens represent traditional assets, investors who believe that those assets perform well in the future will invest in them, hoping to make huge profits in future.

Investors who are looking to use a particular decentralized app or project will invest in utility tokens. Lenders, borrowers looking to get native crypto tokens and gamers trying to get access to new features of blockchain games will invest in utility tokens. Additionally, investors who are interested in participating in the governance of the platform will also acquire utility tokens.

Conclusion

Both security tokens and utility tokens are essential parts of the blockchain and crypto ecosystem. And, they made significant contributions to the development and adoption of blockchain and its decentralized applications. While both of them are cryptocurrencies, they are different based on various factors. We hope the present guide helped you differentiate security tokens from utility tokens!

Frequently Asked Questions (FAQs)