Dogecoin, Bitcoin or your own coin? Who cares, let’s talk about tokenomics!
Coindesk published an interesting post last week about security tokens. According to it, security tokens could see rapport growth in Europe, outpacing cryptocurrencies.
We found this extremely interesting, and decided to dig in deeper! Let’s start with the basics, as we always do!
A utility token and a security token have a lot in common. They are both managed by smart contracts and are mainly used in peer-to-peer services. In addition, they are both based on blockchain technology. However, there are multiple differences between them which makes them more like cousins than sisters.
A utility token refers to a blockchain based asset which people can purchase for the purpose of using it for something in the future. Utility tokens have value but they are not money in a similar way as coins. The value may come in different forms like as an option for a future service or product to guarantee better access, for example.
Utility tokens can be listed or exchanged for example in Uniswap. The borderless ecosystem allows people to transfer utility tokens between unanimous “persons” who don´t need to do KYC (know your customer ) or to register in any way.
A security token refers to a tokenised security such as a bond or stock for example. It is like combining blockchain based tokens with the conventional, regulated securities available in the financial markets. To have an ownership of the asset, you need to register. The authentication i.e. ownership of the token is stored into the token itself.
The Securities and Exchange Commission (SEC) sees both utility and security tokens as securities. It has set legal restrictions for tokens, including KYC protocols which means that accredited investors can for example purchase tokens after passing the KYC protocols.
Why are the security tokens now such a big deal, then? Is it not just another form of securing that the security in question is well secured? -Rather many secure-words here, but to answer the question, not exactly.
The World Economic Forum predicts that over the next ten years, 10% of the world’s GDP will become crypto. In practise, it means that $10trn of financial products and services will undergo tokenization. Think about what kind of an opportunity this is!
According to Forbes, Security Token Advisors concluded that in 2021, 15 countries have defined security tokens around the world, and of the top 100 largest banks in the world, 39 of them are working on security tokens or blockchain applications, and of the top 10 largest, 7 of them were working on with security tokens or blockchain technologies. I would describe this as a major step into the mainstream. If seven out of the ten largest banks are working on these, maybe we should stop talking about how blockchain is still “just another nerd thing”.
Security tokens will play an important role as blockchain based technologies will become mainstream. Blockchain enables a much faster and cheaper process to issue for example bonds. Basically it allows near-instant issuing of bonds or stocks as well as instant settlements when trading in exchanges.
Although coins may be somewhat volatile now, it is important to remember that blockchain provides multiple use cases where utility and security tokens are just a few of them.