The world of crypto can be a confusing place, especially if you are a first-time user. When it comes to coins, tokens and cryptocurrency, most people consider them to be one thing, but there are some important differences that distinguish them from one another. Here we go into more detail about utility tokens vs. security tokens to explain what they are and what makes them different.
What is a utility token?
A utility token is a crypto token or app coin that is used within a specific ecosystem. For example, a Brave’s Basic Attention Token (BAT) can only be used to tip content creators while using the Brave browser or via applications that offer integrated BAT wallets.
How do utility tokens work?
In most instances, utility tokens are tied into a specific blockchain project or ecosystem, and their usage is determined by the type of platform issuing the token. This can vary from specific products or services developed by the token issuer. Alternatively, rewards, discounts or other benefits can be offered to token holders.
- Owners have certain rights, such as being able to own or use a product and vote or pitch for specific topics or cases.
- An NFT could grant the holder access to a theatre performance or unique access to interact with an artist.
- You can also decentralise storage with a utility token, and they provide the exchange value for the services they give.
What is a security token?
A security token is the digital, web3 version of financial securities and work in the same way as stock or shares on a traditional stock exchange. This explains why security tokens are also referred to as equity tokens. It also means they are regulated by financial regulation authorities, similar to stocks and bonds.
- Security Token Services (STS) issue security tokens and verify the user’s identity.
- They can be used as an alternative or in addition to a password to authenticate someone’s identity.
- Protection is key with security tokens as they can be lost, stolen or hacked.
How do security tokens work?
Most security tokens run on the Ethereum blockchain, although there are other smart contract-enabled blockchains that support them. They can be accessed in a variety of forms, including shares of ownership in a company, intellectual property rights or any other type of asset. As with utility tokens or cryptocurrency, to buy or sell security tokens you will need a digital wallet and an exchange account.
- Security Token Services (STS) issue security tokens and verify the user’s identity.
- They can be used as an alternative or in addition to a password to authenticate someone’s identity.
- Protection is key with security tokens as they can be lost, stolen or hacked.
What regulation is in place for security tokens?
Regulation varies depending on the territory, although in general terms security tokens are treated in the same way as traditional securities. This is the case in countries such as Singapore, Germany and Switzerland. Having this kind of strong regulation in place makes security tokens a more stable investment vehicle, although the level of risk can vary depending on the transaction.
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