There is a lot of buzz going around about SEC’s approval of trading security tokens. Also, terms like utility token, payment token and security token sound a bit confusing to general users. In this post, I will try to clear up some common confusions about these terms. Just a reminder that SEC stands for U.S. Securities and Exchange Commission. They are the authority and they decide whether a token is a utility token or a security token.
A security token represents a security or asset ownership. A security token gives you legal ownership rights to the companies, products or platforms where it is used. For example, if Golem is marked as a security token by SEC, that would mean GNT token holders have ownership rights to the golem network.
Utility tokens do not provide ownership rights to its network participants. For example, ether is a utility token but it doesn’t give you ownership rights to the decentralized ethereum network. Utility tokens must have one or more specific real use in the network it circulates. Ether is used to pay gas fees therefore it is a network specific use for ether tokens.
It is easier to list utility tokens in exchanges than it is to list security tokens. Because exchanges need approval from local authorities to list security tokens. Security token traders will most likely come under the same laws that rule other types of securities. Hence, trading security tokens will make you a lot more binding to regulations than trading utility tokens.
Features of a Security Token:
- Represents ownership of the network / company
- May or may not have any use in the network / platform
- Comes under existing regulatory framework
Features of a Utility Token:
- Doesn’t represent ownership of the network / company
- Must have one or more specific use in the network / platform
- Has no existing regulations in most countries