To compare utility tokens and equity tokens and their place in the cryptocurrency world, we need to break things down a bit. Tokens are fungible. Tokens have value. The same can be said of cryptocurrencies. The value of tokens is based upon what they represent. A token may be valuable because it was issued to allow accessing of a service. A token may also represent company equity. What they are not is currency. Nor are tokens a store of value like money. They are often referred to as crypto tokens, but they are not a cryptocurrency. Tokens are also often called coins, but that term has become rather generic in the world of crypto.
A Comparison of Utility Tokens and Equity Tokens
Why are they important?
Think fundraising. ICOs, initial coin offerings, are a method for companies to raise funds, to get seed money by issuing tokens. These token generation events are an issuance of tokens to be sold to interested investors in order to raise capital for the issuing company. Tokens reside upon a blockchain and not on their own individual blockchain. Mostly, tokens are issued upon the Ethereum blockchain.
Crypto Tokens: Utility and Equity
Utility tokens and Equity tokens are not the only kinds of tokens. There are, for example, dividend tokens too. Equity and Utility tokens, though, are common. Since they are common ICO (Initial Coin Offering) coins, there is value in knowing what they are and being clear about what they represent.
Equity tokens fall under the category of security tokens. They represent asset ownership. A good comparison is to company stock or to holding a loan. Much fewer regulations involved with equity tokens. At least that was the intent.
Instead of issuing stock via an IPO, a start-up company could issue equity tokens. By utilizing the technology of blockchains coupled with smart wallets, this would be a relatively simple process.
In the case of debt, here’s how equity tokens would work. In order to finance an endeavor, a company has taken out loans. Equity tokens are then issued which represent the company owned debt. The equity tokens, representing the loans, can now be bought and sold. This increases liquidity.
Many have painted a rosy future for equity tokens. This may not be the case. The United States Securities and Exchange Commission has entered the picture. Recently the SEC has said that equity tokens must meet federal securities regulations.
This is a big hurdle for many startups. They simply don’t have the resources to comply with the regulations which are a major reason the equity token route was so attractive to them.
If ICOs are attractive to you if it is something you want to pursue as an investor, make sure you hire a legal professional that specializes in securities law. Their expertise and guidance would be essential.
Utility tokens are a lot different than equity tokens. While equity tokens represent an asset, utility tokens represent future access.
Here’s how that can work. A startup wants to develop a blockchain project. Like any project, this requires capital. Being an investor, you keep an eye out for projects that interest you, that you want to access. Via a utility token ICO, you can buy access to that project upon its completion at a future date. Sometimes this access can be purchased at a discount which makes it even more attractive to the investor.
However, utility tokens are not investments by design. But, many people are approaching them as such. Someone may invest or “contribute” to a utility token ICO because they believe that those tokens will grow in value. They believe that the startup has a solid, bankable idea. They believe that their product or service will be successful and demand for it will grow. That demand would fuel the token’s increase in value.
Equity tokens and utility tokens can both be subject to price fluctuation. Advances, setbacks, changing laws, changing company ownership, technological changes and more can all ultimately affect token pricing.
The main difference between these two types of tokens is that equity tokens represent ownership much like stock. Ownerships confers certain rights.
On the other hand, utility tokens have no such ownership. They hold no ownership rights in any of the company’s assets. They are a coupon.