Among the many tokens that exist on the crypto market, utility and security tokens occupy a special place. They fulfil different functions and serve different purposes, which makes them attractive to a wide range of users.

In this guide, we will explore the key features of these tokens, their differences, and factors to consider when choosing between them.

What are utility tokens?

Utility tokens, also known as user tokens, perform specific functions within decentralised applications or ecosystems. They are often distributed through the Initial Coin Offering (ICO) or Initial DEX Offering (IDO). Holders of such tokens may receive privileges such as access to specific services or reduced fees.

An example of an utility token is the Basic Attention Token (BAT) used in the Brave browser to pay for advertising services. Users may receive BAT for viewing adverts and use the tokens within the ecosystem.

What are security tokens?

Security tokens confirm ownership of assets by giving their holders partial ownership of a company or project, similar to traditional securities such as shares. An increase in the value of the company results in an increase in the price of the security token. For these tokens, it is important to comply with regulatory requirements that determine the existence of an investment contract and the ability to generate expected returns from the token.

Distinctions between utility tokens and security tokens

The key differences between these types of tokens lie in their purpose, valuation and regulation. Thus, security tokens are contracts that prove ownership of a stake in the company or entity issuing the token. Utility tokens, in contrast, do not confer ownership in a company and do not provide income. Their value is unrelated to the current valuation of the asset and they are generally unregulated. Security tokens, on the other hand, are required to comply with regulations and federal laws.

Security tokens can generate potential returns related to the assets they represent, as well as additional security and transparency through regulation. However, their use also comes with risks, such as regulatory changes and market fluctuations. Utility tokens merely provide access to products or services and are not valuable assets, which makes them less regulated but also more volatile.

Understanding these distinctions will allow for a more informed approach to choosing tokens, taking into account individual investment goals and needs as well as the functioning of specific ecosystems.