by Luca Andrade
With all the 2017 Bitcoin buzz you are sure to have heart the word ‘token’ in the news at some point in the recent past. Token this, token that, different projects have tokenized different things running all the way from luxury apartments in New York City to clean energy so you can sell the energy you create with your solar panels to your neighbor. But after all the hype and the noise, what exactly are tokens and more specifically what are utility tokens?
The first point we must touch is the difference between coins and tokens. Not all blockchains are the same and each of them aims to take a part in the “blockchain future” of our societies. In a nutshell; coins are a form of money and tokens may serve broader functions. Blockchains like bitcoin and litecoin are meant to be used as a store of value a.k.a. money, (sort of) like their fiat counterparts like USD or EUR. Tokens, on the other hand, tend to do a little more than “just” being money.
There are different types of tokens; utility and security. Security tokens are assets particularly similar to securities as we currently know it. Security tokens may entitle you to equity in a firm, dividends among other things, in a way much like a normal stock exchange, just now in a blockchain.
Now, let us talk about the things that actually matter; utility tokens. As the name suggests, these have some sort of utility attached to them. They do not serve as a mere store of value, they allow their holder to access a good or service. Picture for example ElonCity, whose token allows consumers to easily buy and sell “chunks of energy”, aiming to drive millions of people, at least partly, offgrid.
Contrary to security tokens, utility ones are not regulated under U.S. Federal law, and therefore their issuers do not have to comply with strict regulation and scrutiny from the Securities Exchange Commissions. With all the hype about Bitcoin, many ICOs tried to label their tokens as utility tokens in order to avoid any problems with the SEC and other regulators. However, a question worth bearing is: If investors expect the value of their tokens to increase over time, can’t they be considered securities?
According to Medium, over 95% of the projects have issued utility tokens, showing a clear preference from developers to shy away from regulators. Some of them deliver real products, most of them don’t. Due to the still highly speculative and ambitious nature of blockchain projects, most utility tokens to this day still remain only investments, without allowing their owner to exchange it for anything else other than fiat money or other cryptocurrencies. In theory, if one token entitles its owner to receiving a one unit of a good in the future, this price should not be much different from the price of the same good in the “normal” market. Using Medium’s example, if the price of 1GB of cloud storage is $5, the price of one token that represents 1GB of cloud storage shouldn’t be too far off. Utility tokens must have a real world value associated to them.
What can we expect in the future? As for the majority of things in life, timing is everything. Those who thought the world would transition from a non-blockchain world into all blockchain everything environment in a matter of a few months or years were wrong. Blockchain applications are steadily picking up and with time we should expect utility tokens to become more utility and less security. As time passes, the deadlines for the “goods from the future” become closer and this type of token tends to lose its speculative power and prices tend to reach what consumers deem a fair value.