Utility Tokens vs Security Tokens
With that out of the way, we are sure that you are curious what the difference between utility tokens and security tokens actually is, so without further ado, let us dig deep into their differences.
Utility tokens are known as user tokens or app coins and they are future access to the product or service a business is offering. Through these tokens, many ICO startups can raise capital in order to fund the development of their blockchain project in exchange for the user to have future access to the service, it’s that simple.
These utility tokens are typically not designed to be a standard investment for a share of the company. Through the creation of these utility tokens, a startup has the ability to sell digital coupons for the service that is currently in the process of development.
Now, moving on to security tokens. When a token derives its value from an external and tradable asset, it can increase in value based on the efforts of others and it is classified as a security token. This makes it subject to federal securities and regulations.
When someone fails to abide by these regulations, they are greeted by costly penalties. This is why many businesses have to meet all of the regulatory obligations. The moment a token is classified the right way, a wide array of applications are permitted, including the ability to issue tokens that can represent shares of the stock itself.
Pros and Cons of Initial Coin Offerings (ICO)
When we discuss an IPO, the investor will receive shares of the stock in a company in exchange for the investment that the investor has made to the company. However, in the case of an ICO, there are no shares.
The companies raising the funds provide a blockchain equivalent to a share in the form of a cryptocurrency token. As such, investors pay in a pre-existing token such as Bitcoin or Ether and receive a number of net tokens in exchange for their investment.
It is extremely easy for a company to launch an ICO and create tokens, and there are even online services that allow for the generation of cryptocurrency tokens in seconds. This is why many investors need to keep this in mind when considering the drastic differences between shares and tokens.
Avoiding ICO Scams
If you have the ambitions of being a crypto investor in the future, and an ICO has caught your attention, there are a few things you can do in order to protect yourself from a potential scam.
For one, you should always ensure that the developers of the project can define what their eventual goals with the project actually are. Most of the successful ICOs out there will have a straightforward and understandable whitepaper with clear goals.
You also need to know the developers and hope to get 100% transparency from a company that has launched an ICO. Always look for legal terms and conditions that are set for the ICO, due to the fact that the outside regulators do not oversee this space.
Finally, ensure that the ICO funds are being stored in an escrow wallet. This is a wallet that requires multiple keys in order for anyone to gain access to it, and this in a way acts as a scam protection mechanism.
An Initial Exchange offering or an IEO is conducted when a new crypto project has the intention of launching a cryptocurrency or a blockchain but is in need of an investment in order to accomplish such a task.
An Initial Exchange Offering is different from an Initial Coin Offering due to the fact that it is made possible through the help of a cryptocurrency exchange. Projects can raise funds through the help of the exchange’s customer base and as such, launch trading for their token.
Now, if you want to get a little more in-depth, an Initial Coin Offering involves the usage of a cryptocurrency exchange in order to raise funds for a new project, and as such, you will find it a common sight to trade assets on digital platforms.
The potential investors here have the ability to buy assets before they even become available on the market, and through the help of the exchange facilitating the token sale, many of the users who are registered and provided their KYC information are able to buy tokens before they even start trading on the open market which is interesting.
KYC or Know your customer refers to a process that banks, as well as many other financial institutions, tend to use in order to identify data and contact information from the current and potential future customers. The purpose of this is to prevent money laundering and fraud and the misuse of accounts.
Now, due to the fact that an IEO is facilitated through an exchange, the startups who want to go this route need to be extremely detailed, serious and determined about their course of actions.
Many times, the ICO proposals are reviewed by the participating exchanges and the exchanges put their reputation on the line due to the fact that they decide that they want to support an IEO and offer it on the exchange itself.