SECURITIES VS. UTILITY TOKENS

II. General Characteristics of Securities Tokens

The nomenclature for the term “securities token” is unclear and the term securities token has not been defined. The lack of a clearly delineated nomenclature resulted in various uses and interpretations of the term securities token. Typically, commentators use the term security token as a synonym for tokens that are treated as investment contracts or stock in a blockchain company.[7] Securities tokens typically constitute an investment contract, where the primary reason for the token purchase by investors, and main use case of the token, is the anticipation of future profits in the form of price appreciation, dividends or revenue share.[8] While the lines between the different types of tokens are blurred regularly,[9] securities token are typically investment contracts, whereas utility tokens typically provide their users with access to a product or service.[10] In other words, securities tokens involve an underlying interest or function of the token to replace actual financial securities, such as shares or equity in legacy businesses.[11]

III. General Characteristics of Utility Tokens

The term utility token is used to identify tokens that have an intrinsic utility for a good or service. Utility tokens emphasize the uses of the token and typically give their users access to a product or service or give rewards to incentivize desirable behavior on the respective platform.[25] In order to interact with a given platform or use case, users are incentivized to acquire access rights to the product or service through the acquisition of the utility token. Utility tokens may also take the form of a digital coupon that can be redeemed in the future for discounted fees.

IV. Distinction between Utility Token and Securities Token

Utility tokens can be distinguished from securities tokens based on several core factors, including but not limited to the following: the purpose of the token, associated valuation, associated rights, user expectations, and regulatory status.[38] The purpose of securities tokens is typically to serve as investment contracts that represent the legal ownership of a physical or digital asset. By contrast, the purpose of utility tokens is typically to help create an internal economy within a given project’s ecosystem, granting users access to services, voting, and governance rights within a specific project’s ecosystem.[39]

V. Conclusion

The digital asset industry will continue to refine the terms that apply to its key projects and features. The term securities token is fairly well defined in 2022 and any additional regulatory guidance will continue to delineate its central features and distinguishing characteristics. Utility tokens can be distinguished from securities tokens. As the industry matures, the distinguishing features and associated case law will likely increase and provide more guidance to market participants.

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