What is a Security Token?

. 3 min read

When designing an ICO, or even thinking about investing in one, it’s important to understand the overall role of the digital token.

Tokens can serve many different functions - from providing users with access to a particular service, to granting them entitlement to company dividends. Depending on this function, they will be subject to different regulations that the issuers must comply with.

There are two different distinct types of crypto tokens: utility tokens, and security tokens.

Security Token vs. Utility Token

Few people know the specific differences between security and utility tokens. Because the classification is still a relatively new concept, the line between the two still remains somewhat blurred.

Several organizations have come up with a number of requirements that distinguish a security token from a utility. However, the distinction between the two is important because each token has very different rules that must be adhered to in order to achieve regulatory compliance.

Utility tokens provide users with access to a company’s products or services. They are not designed to be investments. For this reason, they have fewer regulations to comply with than security tokens.

Security tokens, on the other hand, derive value from an external, tradable asset and are classified as investments. As a result, they are subject to federal regulations.

Whilst the regulations for security tokens are stricter than for utility tokens, there are also many advantages to classifying a token as a security. Most prominently, the distributed tokens can represent shares of a company.

The Financial Market Supervisory Authority (FINMA), a Swiss financial regulator, recently published guidelines to define the differences between utility and security tokens. In these guidelines, security tokens are defined as assets that represent “debt or an equity claim on the issuer.”

How Can I Make Sure I Comply With These Regulations?

The world of ICOs is still largely a case of trial and error. As a result, new regulations are being created and old ones are being removed all the time.

For anyone looking to start their own ICO, this can seem daunting. Failure to comply with the required regulations can lead to hefty fines, which can quickly derail your project. It doesn’t help that these regulations differ depending on which part of the world you’re living in.

Over the past couple of years, an increasing number of platforms have launched to help make the process of creating an ICO easier.

One such platform is Rocket, the software designed by EtherParty to help users create and launch their own token generation event. It allows users to make a start and get their business off the ground without having to hire an entire development team to help them out.

To simplify the creation of the event as much as possible, Rocket provides a simple step-by-step process for users to follow, combined with constant customer support. This is designed to ensure that token generation events can be launched and tracked smoothly.

Essentially, a project that usually takes a 6-month timeframe to research, develop, and launch can now be created in a matter of minutes.

Seems appealing, right?

Does This Mean Bitcoin is a Utility...or a Security?

Since Bitcoin has not yet been formally regulated, it is ultimately difficult to determine what kind of token category Bitcoin belongs in. One thing is for sure, Bitcoin and Ethereum and not Securities. Bitcoin and Ethereum are both decentralized, meaning that they are controlled by no entity or company. As a result, it's unlikely that they fit the trait of a security token. This statement is backed by, William Hinman, director of corporate finance for the U.S. Securities and Exchange Commission (SEC). The SEC ruled that Bitcoin and Ether are not Securities earlier this year.

Ethereum is an example of a utility token. While it is true that in many cases it is purchased as an investment with the expectation of profit, Ether’s primary function is to fuel the Ethereum platform and facilitate transaction fees.

The Vanbex Group summed up the differences quite succinctly in a blog post, stating that:

“Bitcoin, much like digital gold, is a genuine cryptocurrency, developed post-recession as a decentralized alternative to fiat currency outside the scope of central banks.

The Future of Token Generation Events

As the crypto industry continues to progress, and regulations get stricter and tighter, there is little doubt that the creation of Initial Coin Offerings and Token Generation Events will continue to get increasingly complex.

Rocket, and platforms like it, could very well become the future of creating new tokens.

Sign-up for an account at rocket.etherparty.com and receive exclusive product updates, free guides to launching token crowdsales, and other helpful information to secure the funding goals of your project.