For Startups

Security tokens complement utility tokens, rather than compete with them

For the past two years utility tokens have dominated the crypto-fundraising market. The two most popular classifications are tokens functioning as “subscriptions” for services and “protocol tokens” that would “burn” in the process of the blockchain infrastructure functioning, just like your usual license keys would. The emergence of security tokens, however, has the potential to broaden the investment horizon by expanding the selection of available investment instruments in 2019.

Security tokens can be classified into the following categories:

1) tokenized assets, starting with physical assets like gold or real estate, and moving to intellectual property rights; IP rights can be “fractioned” into tokenized units and sold on the auctions;

2) tokensresembling shares that differ from tokenized assets in how blockchain technology is being deployed; it is used to store a record about company’s shares. In other words, record in a blockchain becomes a share itself from a legal viewpoint;

3) “exotic” token-securities, e.g. those issued via the Digital Warrant Offerings; or classic financial instruments deposited with licensed depositaries, that issue blockchain-based receipts, that can be sold on the ATS;

That does not mean that utility and protocol tokens will be completely “out of fashion”. Their strength still lies in the decentralized governance and the network effect they create, which means that they will remain relevant for deep tech projects. At the same time, securitization has been one of the main trends of 2018, which was acknowledged both by regulatory authorities, startups, and even by the blockchain technology itself.

We can consider the season of security tokens to be open based on the following:

1) most of the developed markets have already adopted requirements for their issuing;

2) some brokers have “upgraded” their license to work with virtual assets and their derivatives;

3) platforms that planned on legally enabling security tokens trading have now launched publicly and received all necessary licenses.

Despite all of that, I do not think that security tokens compete with utility tokens for the place under the sun, as their use cases do not overlap in any way. Instead, I am predicting that they will create a synergy and complement each other. Utility tokens will lie at the heart of blockchain platform’s infrastructure to enable the issuance of security tokens. Thus, each of them will play a role they were destined to perform. Utility tokens will ensure that platform functions properly and security tokens will act as an investment instrument.

Nestor Dubnevych, Co-Founder at Legal Nodes

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