Step Aside Utility Tokens, Security Tokens Are Coming
There’s been lots of buzz these days about *security tokens*, a new token class that many cryptocurrency industry insiders believe is the future of tokenization.
In late 2017, as bitcoin faltered and the ethereum ecosystem gained a significant foothold in market share, many speculated that the flippening was imminent. Ethereum and bitcoin are aimed at different realms, however, so the importance of one having more value over the other is minimal.
With the advance of security tokens likely to accelerate in 2019, there is another, more relevant type of flippening afoot — the usurpation of utility token dominance by security tokens.
For an outside observer looking in, the difference between security and utility tokens may seem marginal but, upon closer inspection, the two token types couldn’t be more different.
Utility tokens are tokens issued by a blockchain network to serve a specific functional purpose within the network ecosystem. Ethereum’s token, ether (ETH), is issued via mining and is used within the ethereum network as a type of fuel, referred to as *gas*.
Owning ETH or any other utility token does not confer ownership of the network to the token-holder, nor does it entitle the token-holder to anything that resembles traditional shares in companies. In fact, most utility tokens are used for governance rights such as voting for protocol-level network changes.
Utility tokens *do* resemble securities when used for staking, however. In a staking arrangement, token-holders volunteer their tokens in a form of escrow to do the work of consensus-building on a proof of stake blockchain network. In return for staking, token-holders are given a reward that is commensurate with the amount of tokens staked.
Who owns the network in a decentralized blockchain system that issues utility tokens? Technically speaking, no one, not even token-holders.
A common accusation put forward by crypto-observers is that utility tokens only exist to skirt the securities laws of most countries. Whether that is true or not is impossible to say — but, what is true is that the blockchains of tomorrow are increasingly looking to issue tokens that comply with existing securities regulations.
In contrast to utility tokens, security tokens look much more like traditional shares in a company while still remaining decentralized. Whereas the value of a utility token comes from the usefulness of the network it runs on (and, therefore, the usefulness of the token itself), the value of security tokens is inextricably linked to the value (profit) of the blockchain it’s issued from or the asset it represents.
To put it simply, security tokens blend the innovations of utility tokens with the traditional ownership of company stock. Utility tokens holders are exactly that — holders. Security token owners, on the other hand, own the asset itself and are investors rather than holders.
Security Tokens Will Be Bigger, Much Bigger Than Utility Tokens
The flippening we are going to witness beginning in 2019 will happen for one simple reason: The sheer volume of publicly and privately held assets that will be tokenized via security tokens is astoundingly huge.
Don’t think $1T or $2T. Instead, imagine hundreds of trillions of dollars worth of assets like real estate, oil, diamonds, and more, all on the verge of being tokenized. The implications of tokenizing assets and the global liquidity that will result are beyond the scope of this article, but suffice to say, security tokens are going to change the world’s financial landscape as we know it.