Scroll to top

Why Tokenize? Difference between the Security and Utility tokens

Security tokens are believed to be a multi-trillion euro opportunity. While ICO has grown to be an important method of raising capital for start-up companies, the potential of the security tokens is far bigger and has a potential to disrupt the financial industry to its core.

What’s the difference between an ICO (initial coin offering) and a STO (security token offering)?

Most of the tokens on the market today are issued as utility tokens. Utility tokens generally provide a future access to a service or a product. It’s debatable whether the majority of the tokens actually are utility tokens, but the time will tell how the regulators will tackle this issue.

The second important class of tokens is the security token.

A security token is backed by external, tradable assets, and can represent a real share of the company. Security tokens give you ownership rights, whereas utility tokens are more like a gift card for company products/services. The main reason for people to buy the security token is the anticipation of the future profits. These profits can come in form of revenue share, dividends or price appreciation (in case you’re wondering: aren’t the future profits also the main reason why people buy the utility tokens? It is, and exactly for that reason, the SEC does not consider most of the tokens out there today as utility tokens).
Security tokens are the same securities we have now, with an electronic wrapper – a programmable asset ownership. And once something is electronic, it’s easier, faster, and simpler to utilize, compared to paper securities.

Benefits

Tokenization of assets will help (small to midsize) companies and owners of particular valuable assets to have access to capital and liquidity that wasn’t available before. High-tech companies that are raising large sums of money from VCs don’t have such a problem, but most of the businesses will find it as an extremely beneficial way of growing the company. As tokenization helps to fractionalize equity and assets, it will be possible for people with less capital to invest and build a portfolio of assets that they couldn’t buy before. For example, tokens of real estate funds.

As the pool of investors will increase, it provides unseen liquidity for issuers. With tokenized securities, there are no geographical restrictions (depends on restrictions set by the issuer).

It will also be cheaper to participate in this market. The smart contracts guarantee the asset ownership and the secure trading, which means a lot of the middlemen will be cut out. Though it’s important to note that it’s still a regulated market and requires regulated market participants for some of the functions, like facilitating trading.

The security tokens can provide the same rights to the investor as ordinary securities – voting rights, dividends, a share of revenue, etcetera. How the concrete offering is structured and the features of the tokens are based on the needs and goals of the projects.

Last, but not least – token investors will become the brand ambassadors. The tokens can provide some utility as well (or it’s possible to do a hybrid offering of two types of tokens) in form of discounts or rewards, so the investors can promote the services or products of the issuer.

Going forward

2018 has seen it’s first security token offerings – electric scooters (Spin), a hotel (Aspen St. Regis), real estate funds (BlockEstate, etc), a pot stocks fund (7pass) a loan platform (Corl), a bank (Union Bank AG), and several exchanges– there have already been successful raises, and many will follow, as the market is expected to explode in 2019.

As the market of the STOs is still very new, the investors have unprecedented interest in new offerings of the security tokens. At TokenizEU, we’ll continue to drive the innovation and traction of the STO market in Europe and Nordics.