From Overstock’s newly launched tZERO morphing from an ICO to an STO with its own security tokens to J.P. Morgan’s co-president Daniel Pinto stating that the tokenization of the economy is real, 2018 has been a booming year for Security Token Offering (STO) news.
But why is it that security tokens have a leg up on utility tokens, and which is the future of cryptocurrency?
To answer that, we’ll need to first explore the main differences between the two classes of cryptocurrency tokens currently vying for investor attention.
Utility Tokens
When Bitcoin was first created in 2009, its aim was to decentralize the power of banks. Along those same lines, the purpose of a utility token is to allow for greater liquidity and accessibility in crowdfunding launches.
During these launches, called Initial Coin Offerings (ICOs), investors purchase utility tokens now so that the company can develop a product that the buyer of the token can later redeem for a good or service, much like a gift card would function.
Unfortunately, some of the very reasons why utility tokens initially generated excitement, are the same reasons investors and the U.S. Securities and Exchange Commission (SEC) are beginning to see utility tokens in a negative light.
No Intrinsic Value
Going back to our gift card comparison, a utility token only has value because the token issuer says it does.
But just like a gift card, this assigned value is meaningless in the real world. You can’t use your Home Depot gift card to buy groceries at Whole Foods, just as your utility token is only meaningful to the token issuer.
Because the value of a utility token isn’t tied to the value of an underlying business or a physical asset, it intrinsically has no value. Which means if the value the token issuer has assigned it evaporates, your investment is lost.
No Regulation
What was initially seen as an advantage to the utility token has become its weakness.
While 2017 was the biggest year for ICOs and utility tokens yet, in 2018 funding for ICOs is plummeting because of a crackdown from the SEC.
The SEC is looking to protect investors from utility tokens that are actually unregulated security tokens in disguise. And while it’s good that global regulators are working to safeguard investors from false claims, this may mean that the ICO and utility token boom is over.
Security Tokens
What sets a security token apart from a utility token is that its value is tied to an underlying business or physical asset. And unlike with a utility token, with a security token the buyer actually owns a piece of what the token represents.
A security token is an investment contract — the motivation to purchase the tokens is the anticipation of future profit in the form of dividends, revenue share, or price appreciation.
Security tokens are really no different from traditional, private security interests. Whether the token represents a share in a company or interest in a trust, you are taking something that used to be on paper and making it digital, just as communication has moved from snail mail to email.
So why might an investor choose a security token over a utility token? Here is a list of the major advantages:
- Cost-effective: smart contracts eliminate intermediaries, which cuts down on costs.
- Fast: KYC and AML checks are automated, which speeds up the selling process.
- Global: depending on structure, you may be able to trade from anywhere in the world.
- 24/7: time zones need not apply — crypto trading isn’t confined to stock exchange open hours.
- SEC Compliance: unlike utility tokens, security tokens are fully compliant with SEC regulations, so you don’t have to worry that you are trading outside of the law.
According to Dhiren Harchandani, CTO of NYCREC:
“Security tokens are clearly the future of the blockchain sector and will build credibility with the international investing community because of better investor incentives, organizational structure, and compliant best practices. This will provide the baseline structure for our collateralized blockchain technology that can function for any asset class.”
Who owns the future of crypto?
Security tokens like New York City Real Estate Coin (NYCREC) offer the world of crypto something new: liquidity, accessibility, traceability, and decentralization — and all within the bounds of security law.
Because they are backed by real-world assets — like real estate in the case of NYCREC — security tokens have a major advantage over utility tokens, which are backed by nothing. Security token investors can rest assured that their investment won’t disappear overnight on a market whim.
The opportunity to tokenize physical assets is endless — real estate, art, and goods galore. With its many advantages, transparency, and safety, security tokens are the future of cryptocurrency.
Want to be a part of the future with NYCREC? Read our whitepaper and join our Telegram group to be a part of our active and helpful 24/7 community.
