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Why Utility Tokens Suck — A Case for Security Tokens
Photo by André François McKenzie on Unsplash
Don’t let Bitcoin’s rally fool you — utility tokens, ICOs, and crypto still have no serious future in terms of mass adoption. With the on-going crackdown on unregulated ICOs, including the SECs recent move against Kik’s illegal ICO, most serious discussion is shifting towards Security Tokens.
What is the crypto dream?
It’s a farcical medley of:
- Making money without doing much work
- Not having to pay taxes on that money
- Investing without regulations
- Decentralizing everything
- Anonymous participation
Crypto was (and is) driven by the deep belief that one day, we’ll have a decentralized world powered by blockchain, and that you can take part by investing in Random ICO. Millions of people are speculating on the future value of Random ICO, and those who aren’t are experiencing FOMO.
The premise of an ICO is to make available utility tokens for users, allowing access to and usage of certain features in a network. Well, that’s the idea. The reality is that there have been more than 600 scam coins, which is why we’re finally seeing regulators push back on illegal cryptocurrencies.
Utility Tokens Themselves Are (Mostly) Bullshit Too
If you (1) invest money into a token and (2) hope to get more money out, you invested in a security token, not a utility token.
Those are the basic tenets of the Howey Test — meaning if they hold true, and you call yourself a utility token, you’ve potentially violated United States Securities and Exchange Commission regulations.
Moreover, if a token lists on an exchange, it now has real-world value, and is open to investment. So if it wasn’t deemed a security before, it almost definitely is now.
The Anonymity Problem
Also, almost every legal jurisdiction in the world has KYC and AML regulations (Know Your Consumer and Anti Money Laundering) to avoid funding of terrorism and other crime.
Trying to escape these regulations, that have been put in place to safeguard people from crime, is not a good spot to be in.
In other words, anonymity is not a good spot to be in. The pseudo-anonymity attempted by many utility token projects results in difficulty in complying with the (legally necessary) KYC/AML regulations.
The Answer — Security Tokens
Tokenizing assets has long been discussed as a leading blockchain use-case. Security Tokens are stemming from the realization that it’s still vital to comply with the same regulations as traditional securities, but we can still gain many of the benefits of blockchain.
It’s the best use-case out there, enabling greater operational efficiency, greater liquidity, fractionalized ownership, easier capital raising, 24/7/365 markets, and many other benefits.
But It’s Not The Final Solution…
Just because Security Tokens aim to achieve greater compliance and to work more closely with regulators doesn’t mean that these projects will succeed in doing so.
That’s why we created a non-biased, no-fee industry organization for Security Token projects — the Security Token Alliance. To illustrate the interest (and need) for such an organization, we grew to over 50 partners in under 2 months, since founding in May 2019.
In order for Security Tokens to realize at least some of the dreams of crypto — such as greater financial inclusion and reduction of intermediaries — projects need to work together, sharing efforts and resources, modeling the community aspect of crypto, but not much else.
Why Utility Tokens Suck — A Case for Security Tokens was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.