Although crypto coins and tokens are bundled under the larger umbrella of cryptocurrencies, there are technical variations that make each unique. As an investor, it is prudent to appreciate these differences.
Crypto coins and crypto tokens are primarily the same from the perspective of an end-user. However, how they are built on the blockchain makes them different. Indeed, crypto tokens can be classified into three: equity tokens, security tokens, and utility tokens. In this post, we demonstrate the main differences between equity tokens and security tokens.
Utility Token
This type of token is mainly used during initial coin offerings (ICOs) to give holders privileged services and is mainly speculative. They are a sort of promotional tool for the issuing company. In most cases, firms use them to gather funds that are required for developing a crypto project.
During the initial stages, the price is static, but it changes when the projects are launched, and the tokens hit the market. Once purchased, the tokens are stored in a crypto wallet and do not represent a stake in the project under consideration. So, is Bitcoin a crypto token?
Cryptocurrencies, such as Ethereum and Bitcoin, are encoded into their respective public ledgers/ blockchains and are used for transferring value. Therefore, Bitcoin and Ethereum are not utility tokens.
Instead of being built into the blockchains, crypto tokens come with a transaction behavior that results from deployment in smart contracts as opposed to being encoded in blockchains. Basic Attention Token (BAT) and Ripple (XRP) are ERC-tokens and utility tokens that operate on the Ethereum blockchain.
Equity Tokens
Security tokens represent ownership of a company. They differ from utility tokens in how the value is drawn. Because the security tokens are regulated by government agencies that help oversight the financial markets, they are considered a safe option and provide returns in proportion to the issuing company.
Security tokens are considered the meeting point between the traditional financial industry and the emerging revolutionary market where interested investors can get into non-crypto businesses.
Equity tokens are considered a subcategory of security tokens and come with a number of benefits to token holders. They are recommended for investors who are interested in participating in the decision-making processes of the issuing company.
Equity tokens represent ownership, usually the stock of an enterprise, with all terms and conditions recorded on the respective blockchain. Like the security tokens, but unlike the utility tokens, they are regulated by securities laws of the respective country where the issuing firm is based.
Equity tokens are issued via equity token offering, which provides holders the benefit of voting transparently on the matters of the issuing company on the blockchain. This means that the participating community acquires control in proportion to their holding. Also, the token holders have the right to get a portion of the profit made by the issuing company. Good examples of equity tokens are BFToken and Enegra (EGX).
One most notable difference between the two is that the utility tokens are not regulated because they provide access to a service. However, equity tokens are regulated because they are specific investments in an asset or company.
