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Security Tokens Vs Utility Tokens: Explanations in Simple Terms

By November 8, 2019 No Comments

Scenario 1

When you enter a brick and mortar casino, you are not expected to make bets or play games with the cash you carry. Instead, you are required to exchange your cash to poker chips when entering. With your cash at hand, no matter how big the amount, is somewhat meaningless unless you do the right thing. Casino machines are designed to operate effectively when you insert the chips. Your card game monitor will not accept cash from you, he/she will only accept your tokens. Most of the time, outside the casino, these tokens (chips) are worth nothing. 

Chips remain as the main fuel of operations within casinos. 

Scenario 2

On the other hand, when you go to a bank, you present your cash to be stored or converted to digital form (currencies). These digital numbers are actually backed by the cash you have stored at the bank. They present the proof that you own an amount of physical cash. These proofs can be presented as a legal tender anywhere in the country of origination. Essentially, the digital numbers you carry about in your online banking apps are securities to defend the fact that you have some physical cash you can lay claim on. In a case, if there is a fire incident in the bank where you originally kept your physical cash, you are not affected because you have a security that you own physical cash. 

The concept of security and utility token has been a topic that many do not seem to grasp. A basic understanding of these terms will avert a great deal of misunderstanding.

Security Tokens

Security tokens are blockchain issued tokens that serve as an investment, a proof that the holder owns a portion of the physical company issuing it. They are backed by an external asset and thus they are tradeable and can be used to service a loan. These kind of tokens are legally binding and makes the holder eligible to get a share of the company profit from time to time. Security tokens gain when they are held (not traded). They also give holders the right to be part of the decision-makers of the company (voting rights). Security tokens are eligible to be called as such if they pass the Howey test or fulfill the following criteria:

  • It is an investment of money
  • The investment is in a common enterprise
  • There is an expectation of profit from the work of the promoters or the third party.

Just like the second scenario mentioned above with money, banks and digital funds backed by cash in banks, a security token serve an almost similar purpose. This is why any company issuing a security token on the blockchain must follow strict rules as laid down by the Security Exchange Commission (SEC).

Utility Tokens

Utility tokens just like the name implies are tokens which serve as the right given by a company to holders to use their services. Utility tokens serve as fuel for different platforms. Just like poker chips work in a casino as explained in the first scenario painted above, utility tokens are used to enjoy services provided by the issuing companies. They have use cases in the decentralized applications created by the issuer. These decentralized applications are not supposed to work effectively without utility tokens. They can also be exchanged for other tokens on cryptocurrency exchanges. The worth of a utility token grows when they are used with the application they are intended for. Most tokens available on the blockchain today are regarded as utility tokens but the bitter truth is that most of them lack real use cases to call them as such. This is one of the points that spurred Carlos Oporto, Wunbit’s CEO into creating a platform that issues utility tokens with real use cases. Wunbit’s WUN tokens serve as fuel for arcade games on the platform. Owning WUN tokens allows users to:

  • Play games within the Wunbit platform. Winners gain rewards that are tradeable for in-game goods within the platform’s market or can be exchanged outside the platform for fiat and other cryptocurrencies.
  • Play iGames: bet and automatically claim winnings directly into their wallets.
  • Gain rewards for reaching high scores per day, or by breaking other user’s records at the leaderboards, etc.

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