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Blockchain Semantics Blog What are Utility Tokens?

What are Utility Tokens?

By Divya Singh | Aug. 17, 2018, 3:09 p.m. GMT

There are three types of crypto tokens:

  • Equity tokens
  • Security tokens
  • Utility tokens

Here, we will try to understand what utility tokens are and why one should consider investing in them. For more information about types of tokens, click here.

What are Utility Tokens?

Utility tokens aka app coins and user tokens represent the future use of companies, products, or services. These tokens are not designed for investment purpose, rather for future usage. Unlike security tokens, utility tokens are exempt from federal laws as they represent further access to services and products. The number of utility is limited hence, as the network grows, so does the value of the utility of tokens. The size of the network and transaction volumes create demand for utility tokens and impacts their prices as well. 

Let's try to understand this with the simple example of a cricket match. The world cup is in full swing and if the team in finals are India and Pakistan, the ticket price will be more. However, if a star player like Virat Kohli gets injured before the final match, the price of tickets will fall as one of the team will end up looking vulnerable due to the injury of their best player.

Utility token is an organizational distinction and not a legal one. In July this year, it was announced that SEC does not consider Bitcoin and Ethereum as securities. However, there are still no official guidelines on utility tokens because of which, the industry is unsure about the regulations they are subject to. SEC also discharged a report specific to tokens, stating that they could be delegated to securities and may eventually be subject to regulations. This came after a majority of ICOs have been unregistered securities and masquerading as utility tokens.

Also, SEC Chairman Jay Clayton warned ICOs against using the phrase utility tokens. He says, "The “utility token” defence might not work."ICOs use utility token phrase to attract the crowd for funding as they will be able to develop a reputation for reliable use of Blockchain technology. 

Difference between Security and Utility Tokens

If a token can derive its value from the external tradable asset, it can be classified as a security token; whereas a utility token derives its value by usage of the token. Security tokens are subject to federal security regulations, unlike utility tokens. Using ICOs, investors can access multiple security tokens from tokens backed by real estate to precious metals, that can be redeemed from coins. Subject to SEC securities and regulations in The United States, guidelines have now been established for whether the arrangement was an investment contract and subject to security regulations in SEC v/s Howey.

Examples of Utility Tokens

  • Golem is a prominent example of utility token. Golem allows users to lend the power of their PC to the network which then collectively uses it to run supercomputers. 
  • BAT is another example where users are awarded BAT token for using BRAVE browsers and viewing ads.
  • Filecoin provides decentralized cloud storage services and is another good example of utility token.
  • AugurSteem, BancorSia are also good utility tokens. 
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