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Utility Tokens vs. Security Tokens: What’s the Difference?

What are utility tokens and security tokens used for? Find answers in this article, along with examples of popular tokens in both categories
May 24, 2022
Utility tokens vs Security tokens

While some people use the terms ‘coin’, ‘token’, and ‘cryptocurrency’ as if they all mean the same thing, they actually differ in function and utility, i.e. how they are used. 

In this article, we will look at two common types of tokens: utility and security tokens. We will explain what they are, look at examples, and explain how you can invest in them.

Key Takeaways

Utility Tokens

  • Utility tokens are designed to be used for a specific purpose, for example in a DApp or in a game
  • They offer holders a number of benefits, often access to products and services
  • Examples are Axie Infinity’s Small Love Potion, MATIC, and Filecoin

Security Tokens

  • Security tokens (STO) are the digital, web3 version of financial securities
  • They offer ownership in an asset and are regulated by the government just like classic securities
  • tZero and Blockchain Capital are among the two most well-known examples

What are Utility Tokens?

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Cryptocurrencies are intended as a medium of exchange and hold a particular value, just like traditional fiat currencies. Utility tokens, on the other hand, are non-cash assets, and more akin to a ticket or coupon.

In recent years, utility tokens were often associated with initial coin offerings (ICOs). ICOs serve as a way for developers to raise money for upcoming blockchain projects by offering the project’s utility tokens for sale before the project launch. Once the project has gone live, users will already have the tokens they need to begin enjoying its benefits.

Utility tokens run on a wide variety of blockchains and ecosystems, but the blockchain in question needs to be smart contract capable. That’s why the Ethereum chain, the populariser of smart contract technology, is still the most common choice for project developers. Tokens built on Ethereum are known as ERC-20 tokens. Other chains that utility tokens run on include e.g. NEO and Stratis.

How do Utility Tokens Work?

Generally, utility tokens are tied to specific blockchain projects or ecosystems. 

Depending on the platform issuing the utility token, they can provide a wide variety of uses to the token holder. Some may provide access to certain services or products developed by the token issuer. Others offer discounts, rewards, or additional benefits to token holders.

Examples of Popular Utility Tokens

Axie Infinity

  • Axie Infinity is one of the best-known play-to-earn (P2E) games on the market
  • It features a utility token called Smooth Love Potions (SLP)
  • By earning or purchasing SLP, players can perform exclusive in-game tasks
  • However, outside of the Axie Infinity metaverse SLP are useless

Filecoin (FIL)

  • Filecoin is an innovator and market leader in the cloud storage space, offering users the ability to rent out unused hard drive space via its unique peer-to-peer system
  • This has pushed the cloud to web3
  • Its use of advanced cryptography ensures all your data remains unchanged and unseen by curious or malicious eyes
  • FIL, Filecoin’s utility token, can be used to gain access to the platform’s network and storage space

Cronos (CRO) 

  • Token holders can use CRO to convert crypto to fiat at a reduced price
  • CRO is allows users to participate in a number of DeFi projects in the Cronos ecosystem
  • Crypto.com has designed the Cronos blockchain and CRO to make it simple for merchants to accept cryptocurrencies as payment

What are Security Tokens?

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Like traditional securities, security tokens are a financial asset that represents investment or ownership of an asset and can additionally provide holders with certain privileges, such as voting rights.

Securities as you Know Them, but on the Blockchain

Security tokens are digital contracts that define fractional ownership of an asset, similar to stocks. This is what has made security tokens so attractive to many in the traditional finance (TradFi) sector.  For many versed here, they serve as a gateway investment into crypto and DeFi.

Strict Regulation by Governments

Since security tokens act like traditional securities, the government treats them as if they’re the same. As a result, they’re regulated in many jurisdictions, including the US, Singapore, Switzerland, and Germany. Depending on one’s perspective, that can be an up or downside.

One the one hand, it makes security tokens a more stable investment, and less prone to scams due to heavy regulations. On the other hand, many crypto investors seek out the high volatility that other cryptocurrencies like meme coins offer, as they follow a different investment strategy.

Many entrepreneurs in both traditional markets and the crypto industry are viewing security tokens as the next big shift in finance. Due to the name-sake security they offer, they make crypto attractive to the broader majority that is following the early adopters of crypto. Yahoo Finance even forecasted security tokens to grow to US$162 trillion by 2030. 

How do Security Tokens Work?

Just like utility tokens, most security tokens run on the Ethereum blockchain. However, other smart contract-enabled blockchains also support them. The tokens can come in a variety of forms, from shares of ownership in a company, piece of art, intellectual property, or any other kind of asset. 

In order to buy or sell security tokens, you’ll need the same things you do for investing in cryptocurrency or utility tokens: a digital wallet and an account on an exchange that features security tokens.

Examples of Popular Security Tokens

tZero

  • tZero gives companies the opportunity to issue tokenised assets to the public via its blockchain
  • The platform is fully regulated

INX Limited

  • INX is the first US registered security on the blockchain
  • The INX platform offers users the chance to purchase digital securities from an assortment of businesses, giving them the ability to earn e.g. dividends and interest payments
  • Partners with some of the largest banks in the world

What is the Difference Between Utility and Security Tokens?

While both crypto tokens are often named in one breath, their purpose differs vastly. 

Utility tokens are tied to a specific platform and their main use is to access the platform’s features, whereas security tokens are first and foremost an investment.

Putting it in simple terms, a utility token can buy access to a company’s product or service, while a security token can buy you a stake in the company itself. 

The fact that utility tokens can also appreciate in value and often be staked, i.e. used as an investment, and that some security tokens also offer utility as a side effect of owning them might have led to confusion between the two types of tokens. But utility tokens’ main purpose is to be utilised, with investment a secondary use, while security tokens’ main purpose is to be an investment, while their utility is secondary.

Finally, it’s important to recognise that security tokens are regulated by the US and many other governments like any other security, while utility tokens are not. 

Now that we got that out of the way, let’s take a look at where you can purchase utility and security tokens.

Utility Tokens on Crypto.com

You can track the prices of hundreds of utility tokens on Crypto.com Price and buy dozens of utility tokens in the Crypto.com App or on the Crypto.com Exchange, including, of course, CRO, Axie’s SLP, and FIL. Both the app and exchange let you buy and swap utility tokens with low gas fees.

Security tokens, however, must be bought on dedicated security exchanges like those listed above.

Learn more about buying crypto in the App or on the Exchange.

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