When people talk about digital assets, they often refer to them both as cryptocurrencies. But while these different assets often share characteristics—though it’s convenient to discuss them under the umbrella of cryptocurrencies—they are not created equal. With the exception of the two main categories of coins and tokens, each asset in these groups has a unique version. Utility tokens are one example.
If you are new to the cryptocurrency world and unfamiliar with utility tokens, it would be helpful to know more about how they fit into the wider cryptocurrency and investment landscape. Here’s what you need to know to get started.
What are utility tokens?
A coin is a cryptocurrency. When most people think of cryptocurrencies, they probably think of coins — like Bitcoin, Ethereum, Dogecoin, and other things that represent digital currencies themselves, which you can use to make digital purchases. Utility tokens are another class of cryptocurrencies. It is not presented as a coin, but a digital representation of the right to perform a specific action within a crypto ecosystem or platform. While they have value, utility tokens do not function as money in the traditional sense. Instead, they primarily give you access to products, services or promotions.
Since you can use a token to perform certain actions on a crypto platform, it acts as a form of payment in a way; you exchange the token for the right to complete the action. In this regard, tokens have currency-like elements. However, the overall functionality of the coin is limited to its specific ecosystem.
Utility Token Example
In the realm of utility tokens, there are several types of tokens. Although they are functionally the same – they provide access to a product or service – they also work slightly differently. Here are some examples.
Basic Attention Signs
The Basic Attention Token (BAT) exists in the Brave browser space, especially in the advertising section. By opening ads, you can earn BAT. You can then use the BAT you earn to tip content creators.
Chain link
As an “oracle”, Chainlink (LINK) plays a vital role in the execution of certain smart contracts. The wider network collects data from information providers, requiring each provider to post collateral. This allows LINK tokens as an incentive.
How are utility tokens different from coins and other tokens?
Utility tokens differ from other digital assets in several ways. When it comes to coins vs tokens, it is important to understand that a coin is a form of money in every sense. They function in many ways like a country’s fiat currency – like the dollar or the euro. They only exist in the digital space, but you can use them online just like any other type of currency.
While tokens have value, they do not function as pure money like coins. Instead, tokens have other types of functionality. For example, depending on the type, they can represent your rights to future products or interest in a company. In some cases, tokens allow you to perform specific types of actions within the larger system. Certain types of access rights come with tokens. It’s not something people get with coins.
As coins are mined, all tokens are issued at the same time as the cryptocurrency is released. Their initial allocation is determined by the team overseeing each crypto project.
However, each type of token may also work slightly differently. For example, security tokens give you an ownership interest in the company behind the encryption. In this way, security tokens are not much different from traditional stocks. They are just a fully digital, decentralized version.
Utility tokens are different. In most cases, they represent access to a specific product or service in the broader ecosystem of the associated cryptocurrency, and often they can act as a payment mechanism. However, they usually do so only within the confines of the ecosystem they inhabit, rather than broadly, which may be the case with coins.
For example, utility tokens in a grocery delivery app might allow you to pay for meals using tokens. However, you cannot use this token for meals on other platforms; in that regard, it only applies to the app’s ecosystem.
NFTs are technically a special type of utility token. They represent rights to specific digital art, and that art may have value, but NFTs cannot be used as a currency across the ecosystem.
How are utility tokens regulated?
In a legal sense, security tokens are considered traditional securities—financial instruments such as stocks and bonds. This is not the case with utility tokens. They’re not considered investments because they don’t meet certain requirements of the U.S. government agency, the Securities and Exchange Commission (SEC), which is designed to prevent stock market manipulation.
For example, one aspect of the Howey test—a mechanism used by the SEC to determine whether an asset is a security—is expected returns. Since you can only buy utility tokens to perform certain functions within the platform – eg B. buy a meal – there is no inherent profit expectation. This is just one reason why utility tokens are not considered securities.
Instead, utility tokens are generally considered property in the legal sense. Generally, they are taxed similarly to income. If you receive utility tokens as a means of payment, you should tax them as income. Additionally, if the value of utility tokens changes, it may result in taxable income or capital gains or losses, depending on how long you hold the tokens prior to use.
In some cases, utility tokens are seen as an option for safe crypto investments. While their value may not increase (or decrease) like coins do, the fact that you can use them for certain goods and services can provide some security. Tokens will always have intrinsic value to you as long as you use what is offered through the platform. However, this does not apply if you are not interested in what the ecosystem has to offer.
It is important to note that utility token regulation may change over time. Although they are not considered investments right now, they are not guaranteed in the long run. Additionally, regulations affecting the wider crypto space may also change how utility tokens are treated, so it is important to be aware of new regulations as they emerge.
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