Tokenomics: Key Differences Between Security Tokens and Utility Tokens

7 min readAug 9, 2023

“I believe the next generation for markets, the next generation for securities, will be tokenization of securities,” — BlackRock CEO Larry Fink

In the world of cryptocurrency, tokens are a popular way of representing value and ownership. There are two main types of tokens: security tokens and utility tokens. While they might seem similar, they have significant differences in their purpose, regulations, and value.

Before diving into the differences between security and utility tokens, let’s define terms that any beginner, dabbler, or enthusiast of non-fungible tokens (NFTs), the blockchain, crypto, or alternative investments can understand.

NFTs

As a refresher, NFTs stand for “non-fungible tokens” which represent ownership of digitally scarce goods such as pieces of art or collectibles.

Put another way, “fungibility” is “replaceability”.

Non-fungible means that NFTs carry a unique digital identifier that cannot be copied, substituted, or subdivided and, that is recorded in a blockchain. This identifier is used to certify the authenticity, ownership, and rights of a specific digital asset.

Digital Wallets vs. Crypto Wallets: Understanding the Key Differences

Tokenomics

Let’s review the “token” in “tokenomics” — the crypto token. A crypto token is a digital currency that operates on a blockchain, a public ledger of transactions. A decentralized network of devices verifies all transactions and records them on the blockchain.

The developers of a crypto token are the ones who determine its tokenomics since they determine its features and how it works. Although tokenomics has a broad definition, it normally refers to some combination of a crypto token’s…

Maximum Supply
Minting or Burning Process
Costs/Transaction Fees
Token Holder Incentives
Marketplace Distribution
Use Cases & Standards

Security Tokens / Securities Tokens

Because they may be tied to a securities offering, security tokens are issued through Security Token Offering (STOs) and represent ownership shares in a company issuing the token as a form of investment in the technology company’s longer-term growth.

Security tokens are regulated in much the same way securities are regulated in traditional markets and can be classified as:

Equity tokens: ownership and transference occur digitally, equity tokens investors are entitled to dividends from managerial and issuer actions and decisions. Debt tokens represent short-term loans that carry pre-defined interest rates.
Asset-backed tokens: Backed by real-world real estate, art, carbon credits, or commodities as underlying value, asset-backed tokens are tradable and carry characteristics of gold, silver, oil, etc.

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NFTs as Security Tokens

Ask the SEC if NFTs can be considered securities and they’ll say yes.

According to PYMNTS.com, “On the face of it, the idea that NFTs could be securities seems farfetched. Each one is, by definition, unique. That’s what the non-fungible part of a non-fungible token means: Each one is unlike any other.

Of course, there’s an obvious exception to this — tokenizing securities like shares of stock. But an NTF token holding a piece of art or a song? No.

A commodity, yes — a CryptoPunk certainly falls under the very broad legal definition of a commodity as covering “all goods and articles” — but an artwork avatar is not a share of stock.”

Examples of Security Tokens:

Science Blockchain — Launched as the first incubator in the world to be funded by its own tokenized compliant securities. The funds totaled roughly $100 million.
Siafunds — Launched by Sia, a cloud-storage company, Siafunds helps pay out a real-time transaction fee from all storage-related payments on the network.
Vevue — Launched a security token for a Wyoming Corporation for international investors and provided them with non-voting preferred equity shares.
Props — Launched a Security Token for accredited and non-accredited investors under Reg CF in the US via a Token Debt Payable by Assets (DPA) and raised $1.07 million from 794 investors.

NFTs as Utility Tokens

Utility Tokens are likened to digital coupons, vouchers, tickets, or promotional tokens that grant holders special access or promotions to a product or service by the issuer. The holder gains the right (but not the ownership) to access the product or service at a discount or for free.

Utility NFTs aren’t just NFTs for art’s sake of status or collectibility. They hold their value by providing additional utility. Let’s explore what that means.

And as you’d find with any kind of limited-run collectible, utility tokens can grow in value if what your token represents suddenly becomes very popular and in demand, as determined by the sentiment of a community.

And if the secondary market becomes attractive and the holder is incentivized to sell, the owner would reap the benefits of that sale.

Examples of Utility Tokens:

Basic Attention Token (BAT) — Basic Attention Token (BAT) is a utility token made to be used with the Brave browser. The token uses the blockchain of Ethereum.
Filecoin (FIL) — Filecoin is an open-source, public cryptocurrency and digital payment system intended to be a blockchain-based cooperative digital storage and data retrieval method.
Siacoin (SC) — Siacoin is a peer-to-peer decentralized blockchain-based cloud storage platform where network participants rent and use storage space and excess bandwidth from other users.
Civic (CVS) — a flexible identity verification technology that uses digital identity as a gateway for decentralized finance. CVC is an ERC-20 token used on Civic, a decentralized digital identity provider.

Understanding Key Differences

A significant difference between security tokens and utility tokens lies in regulation.

Digital assets that satisfy the SEC’s definition of “security” are called “security tokens” and must be registered with the SEC or fall under an applicable exemption. The value of a security token is often correlated to the value of a company, with buyers intending to hold on to the token to make a profit.

From a regulatory perspective, defining a cryptocurrency as a utility token may be better understood because it isn’t assumed to be regulated. Utility tokens are digital assets or investment contracts that do not satisfy the SEC’s definition of a “security” — so they do not need to be registered (or exempted) at all. The token holder is not holding an equivalent of stock or another regulated asset.

Utility tokens do not get their value from a company like a security token, but instead, have value fluctuations based on supply and demand. They give users the ability to use the token like a pass within exclusive ecosystems to buy goods or access services and unique experiences.

The Bottom Line

While it’s important to note the differences between security tokens and utility tokens, (and we haven’t even touched upon payment tokens or exchange tokens) the fact is this: The creative use of NFTs in the new tokenized economy is only going to continue flourishing.

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The GigaStar team is excited to democratize opportunities for individuals in the Creator Economy. Join our journey as we support the mission to fuel human creativity.

Learn more at https://gigastar.io/ and connect with us on social media!

Disclaimer:

This communication is provided by Creator Networks, Inc., (dba GigaStar). GigaStar is the Parent Company of GigaStar Portal, LLC (dba GigaStar Market), an SEC registered funding portal member of FINRA, and GigaStar Technologies LLC, offering blockchain and smart contract solutions via GigaStar Portfolio.

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