2017 was the year that we were first introduced to ICOs and the utility token really took off. Meanwhile, 2018 has been the year that we have witnessed the birth and the surge in popularity of the security token.
It looks like security tokens are here to stay for the foreseeable future, and many blockchain startups are looking at ways to incorporate them in their projects. But what exactly is a security token? And, more importantly, how does it affect your ICO?
What is a Security Token?
There are two main types of tokens: utility tokens, and security tokens.
Utility tokens are the kind of tokens that are currently used by most projects right now. Their function is simply to provide users with a product or a service. For example, they allow people to use the network, and also allow them to carry out certain activities on the network, such as voting.
In order to be classified as a security, a crypto token must pass the Howey Test. Essentially, this test focuses on two main questions. If the answer to both of these questions is ‘yes’, then it is very likely that the token in question is a security as opposed to a utility.
- Is the token being sold as an investment?
- Is there a person whom the investors are relying on?
Once a token has been classed as a security token instead of a utility token, it becomes subject to federal securities and regulations. These are similar to the regulations faced by traditional stocks and bonds. If these regulations are broken, the ICO could face repercussions. As a result of these increased regulations, many organizations are reluctant to classify their tokens as securities.
For a while now, there has been an increased number of projects operating as utility tokens, when in reality they are securities. In fact, the SEC has recently hinted that most Ethereum-based tokens are, in fact, securities.
What Are the Advantages of Using Security Tokens for my Project?
Security tokens have a number of benefits over traditional financial models. The main benefit is that they eliminate middlemen by enabling the use of smart contracts. This saves a significant amount of time and administrative costs.
It can even reduce the need to hire professionals such as lawyers, as service provider functions can now be automated through the use of software.Due to the decentralized nature of blockchain, the process is now fully transparent, meaning everyone has access to the entire transaction history.
Despite the increased regulations, security tokens also hold a number of advantages over utility tokens. There’s no denying that we’re witnessing an increasing number of frauds and scams as ICOs continue to become more popular.
Therefore, because it is mandatory that security tokens are completely SEC compliant, it means that they have more credibility than utility tokens, and are often thought to be a ‘safer’ investment. As a result, more users are drawn to STOs (security token offerings) as opposed to ICOs, as they feel it is a lower risk investment.
How Do I Leverage Security Tokens in my Next Project?
As security tokens continue to get more popular, there are an increasing number of platforms available to help you launch.
Rocket is a user-friendly token crowdsale creator platform that allows users to create, launch, and track their project without needing to hire a development team. This is a massive step forward for the ICO industry, as it means that a project that would once take creators over six months can now be created in minutes.
The platform is currently designed for utility tokens, but will soon have the option to launch projects that utilize security tokens by helping users to do the heavy-lifting regarding legal matters.
The relaunched version of the platform will be called Rocket 2.0, and this new feature will be known as the Real Security Token Standard (RSTS).
The Future of Security Tokens
Anyone who follows the crypto industry knows that trends vanish as quickly as they appear—and the token landscape is no different.
It’s anyone’s guess as to which projects will come out on top as we move into 2019, but if we can be sure about anything, it’s that they’re probably going to be backed by security tokens. In fact, many people are predicting that 2019 will be the year that institutional investors finally decide to take the plunge and invest in crypto.
Want to Launch Your Own Token?
Sign-up for a free trial of Rocket by Etherparty at https://rocket.etherparty.com/campaign, the user-friendly platform that lets you set up, launch, and track your token crowdsale without a development team.