Token Terms You Should Know in 2018: Utility vs Security vs Commodity

Token sales have been surrounded by controversies, regulatory crackdowns and ad bans. But, nothing has been able to retard the growth of the ICO market. In fact, growth has accelerated, with over $5 billion being raised via ICOs in the first three months of 2018. That’s 31% more than the total amount raised through 2017!

The spectacular success so far has grabbed the attention of startups and investors alike, who are trying to grasp how this new form of fundraising can be used to their own advantage. If you have an innovative idea for which you’d like to raise funds or are considering buying tokens, you need to know about the three types of ICO tokens – Utility, Security and Commodity.

Three Types of ICO Tokens

The tokens or coins issued by a company during its ICO represents some value for the token holder. The nature of this value defines the category of this token.

Utility Tokens: These are tokens that offer future access to an ICO firm’s product or service within their platform or ecosystem. Once the project is completed, token holders can use their tokens to make purchases of services. Take the example of Filecoin, the largest ICO of 2017, which raised $257 million. Token holders gain access to the firm’s decentralized cloud storage platform. This means that its tokens have a specific utility which can be used to purchase cloud storage space. This utility is where the token’s value comes from.

Utility tokens benefit both parties – the investor and the token issuing firm. The investor can use the tokens to purchase services, often at a predefined discount. The firm has customers right from day one of project launch. It does take some time to garner customer momentum, since investors typically wait for the complete project to be ready before using their tokens to make purchases. However, as the project scales, the token exchange rate accelerates, driving use of the firm’s services.

Another benefit of utility tokens is that they are exempted from federal laws governing securities, provided the tokens are structured properly.

Security Tokens: These tokens represent shares of a business and derive their value from a tradable asset. The potential of security tokens is significant, especially if a company creates its own self-sustaining ecosystem in which transactions are facilitated using the tokens. For instance, Overstock’s subsidiary tZERO is planning an ICO to raise funds for the creation of a token trading platform. Holders of tZERO tokens would be eligible for quarterly dividends, based on the profits recorded by the tZERO platform.

The drawback is that since such tokens are designed as investments, they attract federal securities regulations and compliance failure can result in penalties and could even derail the project.

Commodity Tokens: Tokens can be used as virtual currencies, which have the same characteristics as any commodity (like gold) that can be traded with profit-making intentions. Take for instance EOS, which raised $185 million for funding the development of its smart contracts platform. EOS tokens do not represent any value of their own and have no use cases on the EOS platform.