Utility tokens or Security tokens? How to choose the best for your ICO
The cash registers always seem to be ringing with cryptocurrencies ruling the charts across the globe. Everyone seems to be hopping onto the bandwagon of cryptocurrencies, with a stagnant increase in the number of startups offering their own iterations of these virtual currencies. If you too are looking to cash in on this emerging trend, here’s a guide on how to go about deciding the perfect initial coin offering (ICO) strategy for you.
Initial Coin Offering (ICO)
Entrepreneurs rely on ICOs to bypass the rather stringent and often complicated process of raising fund as mandated by venture capitalists or banks. An ICO campaign aims to attain investors to purchase a certain number of distributed crypto tokens, with payment made in fiat or cryptocurrency. Releasing a whitepaper about the project is the first step to staging any sort of an ICO. When the target capital is raised in the stipulated timeframe, the money is diverted towards initiating, executing or completing the project.
You must tread lightly when deciding on the right type of crypto token for your ICO; especially if your project is in banking or finance.
Let’s take a quick look at the different types of tokens and the purpose it serves in the project.
Equity Tokens
An equity token is much like an equity share — it provides the investor with a share of ownership in an organization. This is why, according to the trends in the ICO space, investors have more affinity towards equity tokens rather than a utility token. The valuation of the token depends on the potential value of the product or venture. An equity token ICO will benefit startups since the barrier it keeps for entry into the financial markets will be much lower than it was in the past.
Moreover, this will make the stock trading more accessible to an average investor. This can be attributed to how transparently voting can be conducted using blockchain technology.
In this type, ICO owners are required to do proper KYC procedures and follow the regulatory laws. Ethereum-based smart contracts allow a startup to issue equity or stock tokens through ICO. Given the low entry barrier, it makes stock trading much more accessible to the layperson.
Securities Tokens
Security token gains its value from an external, tradeable asset. Consequently, the value of the token can be made more stable when compared to utility tokens. Through ICOs, investors have access to a variety of securities tokens, ranging from coins redeemable for precious metals to tokens backed by real estate.
In the United States of America, token sales and investments are subject to SEC regulations. According to SEC v Howey, a transaction is a security if it involves monetary investments, common enterprise and an expectation of profit from others’ efforts.
Utility Tokens
A utility token allows for a greater versatility. An example is Ethereum. Ether could run smart contracts and code on the global blockchain and Ethereum, itself is a currency token that can be used to exchange value. Utility tokens are also sometimes called Network Access Tokens, as they provide access similar to that provided by the network. An example of this application is PrimalBase, where the token will allow the user access to a co-working space.
Another name given to utility tokens is app coins or app tokens. These tokens grant the user access to a service or product. As the demand for that service or product goes up, these utility tokens may appreciate over time. However, if these tokens are marketed as an investment, then it’s possible regulatory bodies may consider it a security. This is the case when there is uncertainty about the nature of tokens. Utility token is not a legal distinction; the SEC has not released any official guidelines about it and therefore, uncertainty ensues about any regulations it might be subjected to.
Reputation and Reward Tokens
Reputation tokens mainly help notify the blockchain that a user is special or a wallet did something special. These are essentially markers of reputation or as a reward. Not all such tokens are tradable; it’s not about liquidity. A reputation token signifies that the person bearing it can be trusted. The value of these tokens are hard to evaluate and are significantly intended as an honorary token in recognition of the immense contribution of the holder.
For players looking to enter into this highly competitive space, considering these types of tokens and choosing one that best suits your strengths is really important. This domain has witnessed the death of many a startup that focused on the short-term goal of generating much more cryptocurrency. For long-term and lucrative growth, you have to develop an active developer base and engage other cryptocurrency enthusiasts.
Give the mercurial rise in its popularity and the uncertainty that comes with it, governments are closely monitoring almost all transactions related to cryptocurrency. In fact, some governments like China, South Korea and Switzerland have even gone so far as to ban an ICO. The irony here is that the more cryptocurrency is regulated by various regulatory bodies, the more popular it actually becomes. This, in turn, provides opportunities galore for players with the most effective of strategies.
