The complexity of cryptocurrency is undeniable. The current climate is incredibly volatile with unpredictable changes in the market and with cryptocurrency law racing to keep pace. Not to mention, there are also scams popping up that make it even more difficult for investors who are interested in venturing into this world of digital currency.
Before getting too involved, it’s essential to have a clear understanding of terms. Though many other kinds of tokens exist, there are investors who want to compare things from a security token vs utility token perspective. Understanding the difference between the two can help you identify your options and make the most informed decisions.
What are Security Tokens?
Security tokens are blockchain resources whose value is tied to an outside, tradable asset. In July 2017, the SEC declared that ICO tokens might be securities. This interested many a cryptocurrency lawyer because it indicates that they are subject to federal regulation. While ICOs were never supposed to be securities, the fact that the token gains more value based on the performance of the company indicates that is precisely what it is.
In order to define a token as a security, interested parties can simply use the Howley Test. The Howley Test answers the following questions:
- Does the token offer the opportunity to contribute money and share in company profits of a company that is owned by others?
- Does the token allow for an investment which will increase profits based on the performance of the company?
If the answer is yes, the then token is a security. It should be noted, most tokens fall into this category and are subject to federal laws and regulation.
What are Utility Tokens?
By most accounts, the utility token is in stark contrast to the security token. A utility token is not an investment. Instead, it serves as a representation of access to future products and services offered by the company. Keep in mind; it’s incredibly important to structure utility tokens appropriately or else it is subject to being deemed a security and thus falls into the same federal regulation requirements.
Utility tokens fall into the following categories:
Fungible: tokens that are interchangeable for one another at equal value; there is no individuality. Example: Gold is considered a fungible asset because it is valued based on weight and not the form it is in.
Non-Fungible: tokens that are used to determine ownership of a digital asset. Example: Land is considered a non-fungible asset because each parcel is unique and has its worth.
Consult a Cryptocurrency Lawyer
When deciding between security vs utility tokens, it’s good to keep in mind that the singular focus of evading federal regulation should not be the only reason that you choose one type of token over the other. Many types of utility tokens could meet the needs of a variety of businesses, while others simply don’t. Your best option moving forward is to consult a knowledgeable cryptocurrency lawyer.
At LawTrades, we are committed to providing quality legal services at an affordable rate. We connect clients with the best lawyer for their situation. No matter the size of your business, every client is provided with the same affordable option with fully vetted, highly skilled legal assistance. Contact us today to schedule your consultation.