By Karl Schranz – Director at E&S Group.
There is a lot of talk on the subject of security tokens. Many industry players seem sure that these will surpass utility tokens in importance in the medium term. I tend to disagree. I believe the creation of Utility tokens is the most important innovation for the global economy since the creation of the banking system. I will tackle the reasons why in another post.
In their purest sense, Utility and Security Tokens are not comparable. The only thing a Security Token has in common with a Utility Token is the fact that they are both crypto tokens. Their use, rights and how these are valued could not be more different from each other.
Utility Tokens have a use, hence the name Utility. This is to access the company’s, ecosystems, products or services. In the case of Ethereum, Ether (its utility token) is used to be able to transact on the Ethereum Blockchain. Ether was designed to act as a gas fee. This however evolved with Ether being used to transact in many other goods / services making it more of a currency than a means to transact on a network.
Now Ether is not the best example for this discussion as it has become a cryptocurrency due to its wider acceptability beyond its pure use. If we look at other tokens, we can see that these act as the currency of a specific ecosystem. People buy these tokens to be able to use them on the system or platform that they relate to. This use could be to either pay gas fees, pay commission or pay for specific services on that platform.
Security tokens, again in their purest form, have 2 simple functions.
1.) For the company to raise finance
2.) For the investor to make a return.
This could be either in the form of a share of profit or a fixed return.
Utility token holders have no right except that of using the token for its intended use. Security Token holders would have not only rights assigned to the token (dividend, fixed return etc.) but would also have expectations. These expectations are the expectation to receive more than one paid for. This would mean that the company issuing these Security Tokens have more obligations toward holders of Security Tokens. This is the reason why Security Tokens are and should be regulated.
Utility Tokens are valued as currencies, based on their use, acceptability etc. Security Tokens on the other-hand, are valued based on generally accepted security valuation methods, depending on what return method is being offered. In its simplest form, this would be the discounting of future inflows to present value. This makes Utility Tokens very subjective to value and thus the immense speculation and corresponding price swings that we see today. On the other-hand, Security Token valuations are relatively easy to achieve.
It is thus clear that there is nearly nothing in common between Utility and Security Tokens. Security Tokens are one of many forms that already exist for companies to raise finance and for investors to invest in whereas, Utility Tokens, on the other hand, are the creation of an internal currency that supports an ecosystem.
What is so revolutionary is the ability of a company, to raise capital, by monetising the value of its internal currency!
Karl Schranz is a founding director at E&S Group and heads the Tokenomics and Strategy team. Karl has advised on several ICOs, Crypto Exchanges and Crypto Funds. For more information visit our website.