What is the main difference between utility and security tokens, and why is SEC so important?
Since almost every single news is closely connected with SEC approving or ignoring crypto i would like to know a bit more detailed awnser. I do understand most of it but don't know why is it of so high importance for new investors. Thanks ahead.
I can see multiple questions being asked in the question title and the details. I will try to answer all of them.
> What is the main difference between utility and security tokens?
A security token gives you legal ownership rights to the companies, products or platforms where it is used. And SEC decides whether a token is a security token or not. They are the authority.
For example, if Golem is marked as a security token by SEC, that would mean GNT token holders have ownership rights to the golem network.
Utility tokens do not provide ownership rights to its network participants. For example, ether is a utility token but it doesn't give you ownership rights to the decentralized ethereum network.
> Since almost every single news is closely connected with SEC approving or ignoring crypto i would like to know a bit more detailed awnser.
I don't think every news is talking about it but it sure it getting a lot of attention. The main reason is that security tokens provide a lot more legal protection. Coinbase or other exchanges will need regulatory approval before they list security tokens. If they ignore regulation, they will be prosecuted for violations.
> I do understand most of it but don't know why is it of so high importance for new investors. Thanks ahead.
It is easier to list utility tokens in exchanges than it is to list security tokens. Also, security token traders will most likely come under the same laws that rule other forms of securities. Hence, trading security tokens will make you a lot more binding to regulations then trading utility tokens.
The SEC follows a principle called the 'Howey Test' to identify whether something is actually a security. Essentially, they look at the substance of a thing, rather than whatever it happens to be called, to identify whether something is a security.
I'm not a lawyer, so here is a link to more detailed information about the Howey Test:
https://consumer.findlaw.com/securities-law/what-is-the-howey-test.html
Utility tokens are tokens that pass the test and are not considered securities by the SEC. Security tokens are tokens that fail the test and are considered securities. The reason that it's so important is that any ICO that doesn't register properly as a security and follow the rules that is found to fail the test can have all of its US assets seized. Even if they are offshore, there are treaties in place that con still result in effective action being taken against them in many jurisdictions.
For an investor, it becomes a rather perilous minefield. Anything where you will 100% get rich if the project 100% succeeds is probably a security token, whereas anything with a legit utility token could potentially succeed 100% with the token not ever rising in value at all.
Utility token grants users access to a company's products. It can only be used within that company's platform. Users gain access to use the company's products and systems by owning a particular amount of the company's utility tokens,. Utility tokens are not traded in exchanges and don't have wide acceptance. It's only accepted within the system of the organization that owns such tokens.
Security tokens are tokens that are traded in exchanges and can easily be converted to fiat or other cryptos. These tokens pass through rigorous processes before they are approved by SEC. security tokens are used for business purposes and transactions.
That's the answer I've been looking for. Don't have any sp available to upvote you but will return the "favor". :)
What is the main difference between utility and security, and why is SEC so important?
the question is so complicated, I don't know the difference, I read it still doesn't understand.
Lol? Question is legit, I'm not sure what is so complicated?