Understanding the newest monetary trends – security tokens and their role

The era of security token has already begun, and if you don’t already know at least the basics of the subject, starting your research should be done immediately. Whether your professional activities revolve around the financial market or not, being aware of the latest and most interesting monetary trends is still necessary, the information obtained being valuable in various scenarios. Venture capital funding has certainly been exceeded in 2017 by ICO’s investment volume. Initial Coin Offerings are now more popular than ever. While some time ago, crowd funding initiatives were improperly regulated, now investors as well as startups have become more aware of the legal and regulatory landscape of ICOs. Among the numerous details that should be known on the topic, the following info remains most crucial in regards to token regulations/ security tokens:

What exactly is a token?

First, you should get a clear perspective on what a token is and what it can be used for. A clear definition cannot, however, be provided, considering these can  have different function and take various forms. Tokens can represent filecoins, bitcoin (internal currency systems and their balance), US dollar deposits and the list can go on. A token will usually have one or several of the following roles: digital assets, currencies, company stakes, payments on systems, products or services, rewards. Recently, the term token has been most widely used in regards to cryptocurrencies, this being the FinTech trend that has changed the way we see our financial future.

Legal perspective

With the increase of digital assets, and new altcoins emerging on the market with regularity, investors as well as creators are often faced with the question of how their asset will be treated by regulatory authorities. When the cryptocurrency trend has first exploded, lack of regulations was a worrying issue, but things seem to go in another direction now, more precaution measures being taken constantly. Consider the mufti-facet reality of token, classifying them through a legal stand can be challenging, so governments across the globe are still searching for viable ways of taxing cryptocurrencies by the book. It might still take a while until a clear regulatory system will be built. Therefore, the classic, traditional legal and regulatory classifications cannot be used when it comes to cryptocurrencies and their industry reach. The lack of a clear regulatory system means that investors need to choose carefully their approach, in order to not be faced with challenges or scams.

Token categories

The most important detail you should be aware of, when looking into the whole token subject is that there are two clear categories in which these tokens are separated. The first are named utility tokens, and what these stand for is the means of accessing a specific product or service. To fully understand the role of utility token you could correlate them to a software license, or a gift card. The second category, and the more important one, considering the current position of cryptocurrencies in the financial industry, is the security token. These are considered as an investment opportunity, a contract that provides you with potential future gains, coming from price appreciation, dividends or revenue share. The potential gains are the use-case that determine investors to take an interest in a specific security token. Token offerings are extremely versatile, the number of possibilities available for investors in 2018 being larger than ever,, some of which are even structured as a form of donation, with gains being directed towards charities. However, legal protection isn’t something you will be gaining as an investor, considering the fluctuating structure of this concept.

Security vs. utility tokens

To be able to differentiate a security token from an utility one. While there are many nuances that need to be addressed in order for a token to truly be considered a security one, two questions remain the most important ones for a first classification. In order for the said token to be classified into the security range, the answers to the following 2 questions need to be “yes. The first one and the most important is if the said token is being sold as an investment, and the second if there’s a person you will rely on as an investor. Who will be creating the value of the token? Is the token desirable among investments? What kind of use-value does it provide? Future profits potential needs to be researched as well as the reliability behind the person or the network developing the said security token concept. What you should also know is that a token can change their position, and switch from security to utility, and the other way around, especially when the use-value is still in development process.

Proper security token structure and its benefits

Security tokens that are being issued under certain regulative frameworks, such as regulation crowdfunding or regulation A+ benefit from a more affordable and rapid implementation process than a public offering that comes as a utility token. Legal risks are also reduced this way, this is why, the majority of startups interesting in ICOs development usually go towards the security token direction. Security tokens will soon benefit from far more legal support, various buyer rights, expectations and precautions being developed that are meant to ensure a more effective investment protection. So, as a potential investment, you should first analyze the structure of the security token you have taken an interest in and asses the benefits you might be granted with (dividends or profit share for example).  

With FinTech trends merging and cryptocurrency movements taking a leading stand in the financial industry, it seems that things have been revolutionize tremendously in how people see and handle their finances and investments. Security tokens have become a “hot” topic of discussion lately, bringing new opportunities to the table to investors and organizations. Now that you know a bit more on the topic, and have some basic understanding of this monetary trend, perhaps you’ll start using the opportunities available to your own personal advantage.  

David Jackson

David is a personal finance expert, a professional male model, and an entertainment writer.