Token Classes Explained: Coin vs. Utility Token vs. Security Token
Blockchain terminology can be confusing. But it’s actually quite simple: Coins are a currency, utility tokens offer a right to use a product or service, and security tokens represent an investment product.
In the beginning there was darkness, then came light. Then came fiat money, then digital currencies, then utility tokens and then security tokens.
Ok, there were a few more things in between darkness and security tokens.
It seems though, that when it comes to coins and tokens, many people are still in the dark. So, let’s shed some light and explain the differences.
Coins are money
We mostly use paper paper-money, metal coins or electronic money to conduct commercial transactions. This kind of money is called fiat currency. Any government-issued currency is fiat currency. That means the money supply and value is controlled by a central bank.
On the 31st October 2008, Satoshi Nakamoto created Bitcoin, the first-ever digital currency.
The functionality of a digital coin is just that: a means of payment. It has the same features as money; it’s a unit of account, store of value and medium of transfer.
A crypto coin is not that different from the physical coins that we keep in our pockets, just that it’s digital, and not controlled by a central bank.
Utility tokens offer the right to a service or product
A utility token has a wider functionality than a coin. Utility tokens do have value, but they cannot be considered money as straightforward as a coin.
Utility tokens can provide value to investors in different ways. They give users access to a future product or service.
Typically, a tech startup develops a digital product or service and initiates an ICO (Initial Coin Offering). During the ICO, the company sells utility tokens. Investors can buy these tokens and use them as a means of payment on the platform developed by the issuing company.
A Uber token, for example, could be used to pay for a ride with a Uber car. But not for anything else. If you wanted to use the Uber token to buy another product or service, you would first have to exchange it against either fiat money or a crypto-coin such as bitcoin.
In practice, the use of these terminologies is not as sharp and clear-cut. The terms “coin” and “token” are often used synonymously. The blockchain industry is still young, so the language will evolve over time. However, most industry insiders agree on the broad distinction that a coin is cash and a token is basically everything else.
Security tokens represent an investment
The new star in crypto-town is the security token.
Security tokens derive their value from an external, tradable asset. For example, stocks or real estate.
If you buy a tokenized version of a stock, you will acquire the same rights that you would get when you buy a stock via a traditional stockbroker — profit share and voting rights. The only difference is that a token comes in digital form.
The major distinction to utility tokens is that security tokens are designed to be investments. Thus, they fall under the same regulatory oversight as other investment products.
If a company issues a security token, the process is not called ICO but STO (Security Token Offering). STOs need to be registered with the respective financial market authority. The additional regulatory oversight should add significantly to the safety of STOs and make them much less vulnerable to fraud and misuse.
INVAO’s token represents a pool of selected blockchain assets. Thus, our token is clearly an investment and considered a security token. We raise funds via an STO, which is strictly regulated by the Liechtenstein financial market authority (FMA). We have decided to go for this model, because we want to offer our investors the highest level of safety and confidence in our product.