Even though crypto awareness is at its best at the moment, some people still tend to mix up the terms crypto coin and token. And the difference between utility token and security token is almost indistinguishable on the market. ChangeNOW, the leading non-custodial limitless crypto exchange service, has come up with this guide to hopefully solve the misunderstanding.
What’s the difference between a crypto token and cryptocurrency?
A coin is a cryptocurrency (digital currency) which uses its own platform to circulate independently. Coins do not require an external platform, they operate on their own blockchain where they are the native currency. Bitcoin, Litecoin, Ethereum are examples of crypto coins. A crypto coin is a means of payment that is impossible to forge or change as it runs on the blockchain. The database of transactions and wallets is kept by network members. There is no single server.
Tokens are the currency issued by a company. They are issued centrally without mining. Before an ICO (Initial coin offering), a startup releases a certain number of tokens to suit its needs. Investors interested in the project can invest in these tokens. Information about the investment in the project will be recorded on the blockchain and protected by a cryptographic protocol. In this sense, coins and tokens are similar.
What types of tokens are there?
There are two types of tokens.
“Utility” token the internal digital currency of the company. The purchase of utility tokens provides certain advantages when using the products of this company. Those investments are necessary to simplify the use of the service or is it just the operating conditions of this product. The simplest example of a utility token from the blockchain world can be the domestic game currency.
On the other hand, the “security” token is a digital asset that is acquired to make a profit in the future, essentially it is a digital share. In 2017, the SEC Commission decided that security tokens fall under the regulation applicable to standard shares, i.e. the release of tokens must be accompanied by their mandatory registration.
Are utility tokens securities?
There is a thing called the Howey test to decide what you are buying: a utility or a security token. The final factor in the Howey test is whether any return on investment is largely or completely out of the control of the investor. If so, the investment can be recognized as security. All this, of course, leads to a lot of confusion and to some extent makes most of the utility token potentially security, since they can be sold on third-party platforms. Almost any token during the Howey test gets points and faces the danger of being recognized as an investment tool.