ICO coins: Choosing between utility and security tokens
While trolling through any ICO whitepaper these days, you will see a two to three page justification regarding utility or security token. What’s all this about? Which token should be preferred by the investor equity, security or utility? Well the answer is a bit complicated but before that you need to understand the basic concept and ideology behind these ICO coins or ICO tokens.
The dawn of 2017 saw a rapid increase in the number of ICO capturing billions of fiat currency into their projects. Some were genuine while some turned frauds and the complete money collected via fundraising camping left the investors insecure. Thereafter, in the late 2017, many nations such as US, Switzerland, Singapore actively came up with some regulations and most prominently categorization of token as a security or utility token. Well most of the Blockchain tokens at that time were declared as Securities!!! While deciding upon which works better, the companies usually follow the path which is least regulated.
ICO coins are declared as security tokens when they gain their value from a tradable asset usually external. The main advantage of security token is that, they are not as precarious/ volatile as compared to the utility tokens. These tokens can be in any form such as ICO coins in exchange for precious metals, any investment or may be real estate tokens or anything which leads to an expectation of profit from others. The authorities in the respective jurisdictions have laid certain protocols for declaring the ICO coin as security token or other.
A utility token is a digital asset which is used to grant access or use services of an organization. These are also called network access tokens. A very simple example can be Ethereum token (ETH). ETH is itself an e-currency token which run over Ethereum Blockchain simultaneously powering the smart contracts as well. Due to their nature of providing network access in organizations these are also known as app tokens or coins. A utility token is highly volatile; the value is totally market dependent.
BUT, in case these tokens serve as a form of investment under any case, there may be a possibility that these tokens may be considered as security tokens. Utility tokens generally don’t have to qualify legal formalities of those jurisdictions. The compliance of security tokens comes under the legal distinctions.
Reward tokens, often treated as reputation tokens and are awarded to notify the trust a company has in that person. These tokens may or may not be tradable. These tokens are merely indented to serve as honorary tokens which are offered in order to recognize the contributions made by the participant.
The trend shows that investors are more inclined towards equity token rather than utility tokens. An equity token offers a share of ownership in the company to the investor.
Choosing tokens for your startup
It’s very important to deeply analyze the types of ICO coins trending in the market and study them as per your jurisdiction. Don’t aim at generating super fast money within a short span of time. Give ample time in focusing your idea and maturing it on the whitepaper. Get engaged in other crypto activities and build a good client base so as to ensure an effulgent growth.