Choose the right blockchain coins for your ICO : Security or Utility Tokens?

Towards the mid of 2017 the traditional VC investment method took a complete U turn with a never seen before spike in ICO activity. Hundreds of startups as well as established companies started to utilize blockchain technologies in their businesses, giving birth to many digital coins in the process. The trend though helped these companies to raise funds through the ICO route also attracted the notice of regulators across the globe.

Finally towards the end of 2017, many regulators caught up with  ICO investments. This was when the coins began to be differentiated; officially; into many categories – security tokens, utility tokens, asset backed tokens, share tokens, work tokens etc. But primarily two types form the principal category of tokens that are scrutinised by the regulators as well as help raise investments or can be used in a company’s business ecosystem – the security tokens and utility tokens.

What are Security & Utility Tokens:

The basic idea of a coin being considered as a security token is when or if its increase in value is directly proportional to the performance of a company over a period of time and is being employed by its owners as an asset to trade for based on the company’s financial performance.

As put forth by the SEC (Securities Exchange commission) “It may be called a coin, but if it serves the purpose of a security, then it is a security.”

As of the time of writing; a centralized system that regulates the security tokens is yet to be formed and comes under the direct scanner of the SEC, which generally tends to have a pessimistic outlook on security tokens. Nevertheless initiatives such as the Wyoming’s House of Representatives to exempt some crypto tokens form security & money transmission laws do provide a new ray of hope.

By definition, a security token can be distinguished by the Howey test. The Howey test examines to find answers to the prominent questions that qualify an asset as a security:

Does the scheme involve an investment of money in a common enterprise with profits to come solely from the efforts of others?

The answer to the above question is all the more pertinent to the future of blockchain businesses as a blockchain security tokens value is co-dependent on another’s work. The investor of a blockchain digital coin provides no contribution to the business that increases its value, but rather is depended on the company’s performance; that is contributed by employees of the company; for an increased value of the token he possesses.

As the security tokens attracted the attention of more and more government regulators, another token the utility token came into prominence. The utility tokens are not designed as an investment but an opportunity for the investor or asset owner for a future access of the companies network and services.

So if your company issues utility tokens through an ICO, these tokens not going to be traded as a share or security of your company but rather as a means to be accessd or used in future  in your company’s business ecosystem. If you are an ecommerce company this coin can be used to buy products in your business model. Or for eg: Wetokens are a utility token that can be used in the World WiFi blockchain platform. The ecosystem is such that all transactions in the network happen only with WeTokens. Hence an investor participates in the ICO to buy tokens at a discounte rate; the WeTokens are sold at a three fold discount; that gives them access to the WorldWifi services in future. Generally these tokens are issued in limited numbers and are burned after the ICO. Foe g: the WorldWifi project issues only 258,000,000 tokens.

What Tokens to use for you ICO ?

If you can comply to the securities regulations & laws then you should have no restriction in issuing a security token that can be traded as a company asset among individuals. But most of the ICO’s that have occurred in the past have tend to not comply with the security regualtions and chose the ICO as an easy path to raise investments and have had come under the scanner of the regulators.

Nevertheless, if the idea of your token is solely as a “utility” that can be used to access services or purchase products in your ecosystem, then we recommend issuing utility tokens which generally do not fall under the purview of today’s security & regulatory laws as the tokens themselves to see an increase in value will require you (the asset owner) to “utilise” it and contribute to the blockchain business.

Let us know your block chain business idea, we can help you design the right blockchain tokens for your ICO.

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