Tokens are different in their functions and this is the factor that determines the nature of the tokens that we use. Here are the differences explained:
A Utility Token is a token issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency. They also can serve as a kind of discount or an advantage to access the features of the service/platform.
An Utility Token is not designed for an investment purpose, but rather for a service usage, however it still can be profitable if the demand for it increases . Additionally, a Utility Token does not offer the ownership rights and holders have no control over the decision making process. Examples of the utility tokens are BAT, AVT, XCM etc.
A Security token is a crypto token that gains its value from an external tradable asset, and becomes a subject to govermental or federal securities regulations.
Security tokens are considered as an investment contract and investors are hoping to gain profit from the token through the price movements. Furthermore, Security Token holders also get ownership rights, therefore in some cases investors could recieve dividends or participate in votes that affect internal decision making processes.
Here is a short extract of the FCA and it's "Guidance on Cryptoassets":
"Given the complexity of many tokens, it is not always easy to determine whether a token is a Specified Investment, specifically those types of Specified Investments that are securities, like shares or debt instruments. There are a few factors that are indicative of a security. These factors may include, but are not limited to:
• The contractual rights and obligations the token-holder has by virtue of holding orowning that cryptoasset
• Any contractual entitlement to profit-share (like dividends), revenues, or otherpayment or benefit of any kind
• Any contractual entitlement to ownership in, or control of, the token issuer or other relevant person (like voting rights)
• The language used in relevant documentation, like token ‘whitepapers’, that suggests the tokens are intended to function as an investment, although it should be noted that the substance of the token will determine whether an instrument is a Specified Investment, and not necessarily the labels used
– For example, if a whitepaper declares a token to be a utility token, but thecontractual rights that it confers would make it a Specified Investment, we would consider it to be a security token.
• Whether the token is transferable and tradeable on cryptoasset exchanges or anyother type of exchange or market
• A direct flow of payment from the issuer or other relevant party to token holdersmay be one of the indicators that the token is a security, although an indirect flow of payment (for instance through profits or payments derived exclusively from the secondary market) would not necessarily indicate the contrary
-If the flow of payment were a contractual entitlement we would consider this to be a strong indication that the token is a security, irrespective of whether the flow of payment is direct or indirect (or whether other ownership rights are present).
We hope this article ilustrates the the concepts here, if you have any other questions as always please contact us at CoinMetro's Customer Support.