By
Temitope Olatunji
April 24th, 2024
As more regulatory clarity in the crypto space emerges there is a huge possibility of institutional players adopting security tokens considering the security and liquidity they offer.
Since its inception, ‘Security Tokens’ has been a matter of big debate and controversy in the crypto market. The growing involvement and scrutiny by the regulatory bodies in the crypto space have got them into the limelight again. Currently, Security Tokens just make a very small percentage of the ICOs. However, some experts believe that, and not utility tokens will help to trigger institutional investor participation the next year.
Security Tokens and Utility Tokens
The major difference between security tokens and utility tokens is their functionality and the intended use-case. Security tokens majorly serve as investments. These tokens are the ones that share profits while paying interest and dividends to the token holders. It could be in the form of giving new tokens every time the company makes a profit.
Security Token holders are liable to get ownership in the company. Moreover, blockchain technology enables a voting system that allows investors to exercise their rights in the company’s decision-making process.
Thus, security tokens are more like digital assets deriving its value by trading external assets. As a result, the tokens are subject to federal laws governing securities.
On the other hand, Utility tokens allow access to the company’s services and products. Hence Utility tokens are not said to be investment tools. Neither do they give its users the ability to control decisions made in the company. In simpler terms, utility tokens are like user tokens and app coins.
The Growing Demand of Security Tokens
So far, this year of 2018 has seen regulatory bodies intervening in the crypto market trying to streamline several operations in the unstructured cryptocurrency market. Moreover, there is a growing regulatory uncertainty around the ICOs. Currently, the security tokens contribute to a very small percentage of ICOs. Next year in 2019, the scenario is likely to change.
This is because security tokens provide a bridge between the traditional finance market, the venture capital firms and the emerging blockchain technology. Although utility tokens currently dominate the ICO market, their utility is limited. In most of the ICOs, utility token owners cannot use it beyond the desired platforms. Hence venture capital firms usually stay away as utility tokens are difficult to convert into cash in most of the cases. Security tokens provide a fundamental solution to this.
The inherent structure of security tokens is that they can represent ownership in any asset. This can be a venture capital firm or a tech startup. As a result, security tokens give investors the right into a particular fund or a company. The ability of security tokens to provide easy liquidity to its investors make them a preferred choice for institutional players, even if they come under the regulatory oversight.
Over the next one year, we expect a more stable regulatory environment in the crypto space. Global institutions like the IMF and the FATF are working towards the same. We thus expect some healthy measures from these agencies ensuring the safety and security of investors.
Once regulatory clarity emerges, security tokens will usher through the crypto market.