It’s tempting to only consider the price and market cap when investing in cryptocurrencies. Crypto tokens, however, fall into various categories depending on how they are created, their function, token standard, etc. And based on your goals, this too is a crucial consideration.
Developments in blockchain technology have enabled the creation of many different types of tokens. Spurred by demand for assets with value beyond mere speculation, two categories are capturing the attention of stakeholders: utility tokens and security tokens.
What Are Utility Tokens?
Utility tokens are assets that provide utility within an ecosystem. This involves playing a specific role on their respective platform, such as allowing holders to access a service, execute a transaction, or utilize a resource.
Merely trading a utility token leaves a lot of value on the table. Though you’ll find them on exchanges, these tokens are not designed as investment instruments. Instead, they serve to incentivize and enable user participation in blockchain ecosystems. Therefore, making the most of a utility token often involves using it on-chain.
Examples and Use Cases
- ETH (Ethereum)
ETH is the OG crypto utility token, created in 2016 alongside Ethereum, the first and leading smart contract platform. ETH is used to pay for gas on the Ethereum network.
This gas represents the computational effort required to execute transactions and smart contracts on the network. So, users pay ETH when minting NFTs, swapping tokens, or using decentralized applications (dApps) built on Ethereum.
Validators are also required to stake ETH before they can be allowed to confirm transactions on the network. In turn, they receive validator rewards in ETH.
- BNB (BNB Chain/Binance)
BNB is a token launched by Binance for the BNB Smart Chain (BSC). BSC is a smart contract platform. So, BNB is used to pay transaction fees and participate in token sales on The Launchpad. It is also used to pay for gas when using dApps like PancakeSwap.
BNB’s utility isn’t limited to decentralized finance (DeFi): it has additional use cases on Binance’s centralized exchange, where holders receive trading fee discounts.
- LINK (Chainlink)
Chainlink is a decentralized oracle network. Oracles play a crucial role in DeFi by allowing blockchain applications to access external data. Some dApps use Chainlink’s Oracle services, which they pay for in LINK.
In this case, LINK serves to allow access to off-chain information. It is also used to pay node operators.
- FIL (Filecoin)
FIL is quite infamous, being one of the first utility tokens that is not a smart contract token like ETH or BNB. It is used to pay for storage on Filecoin. This is a decentralized storage network where clients pay FIL to store data on decentralized providers.
These providers are users with extra storage capacity in their computers. They are paid in FIL, but they also have to stake some as collateral to ensure reliability.
- BAT (Brave browser)
Brave is a popular browser among crypto enthusiasts. This is in no small part due to the Basic Attention Token (BAT), a key piece of the browser’s reward and payment ad ecosystem that works by monetizing user attention.
Brave automatically blocks ads, but users earn BAT if they opt-in to view ads. Advertisers pay in BAT, and publishers can receive BAT tips from users.
What Are Security Tokens?
Blockchain technology was initially intended to support peer-to-peer (P2P) payments. But with Ethereum’s launch came smart contracts, self-executing agreements that let people go beyond simple transactions on the blockchain. You can now do interesting things on-chain; build apps, play games, and, relevant to this topic, tokenize assets.
Tokenization is the act of creating on-chain representations of traditional assets. This can be anything; real estate, artwork, stocks, bonds, etc, in a process that involves inputting relevant information into the blockchain and generating a token that signifies ownership. This token is a security token.
Owning one is quite different from holding a regular token. Most coins have nothing more to them beyond the token and its trading price. On the other hand, a security token has an underlying asset. Depending on this, it represents ownership rights, profit rights, or transfer of value.
Another thing that sets these tokens apart from other crypto assets is regulatory recognition. Most countries regulate any investment instrument that counts as a security. Given how these tokens are created, they fall into this category in many jurisdictions.
Thus, despite being a blockchain asset, a security token can only be issued if it complies with prevailing regulations and is approved by the regulating body. This is a delicate and bureaucratic process.
Examples and Use Cases
- INX Token
INX Token hit the market through the first initial public offering (IPO) for an SEC-registered security token. It is also registered in Gibraltar in line with the country’s Distributed Ledger Technology regulatory framework.
The token is issued by INX Limited. It represents ownership in INX Markets, where holders profit share 40% of the net cash flow from INX securities. Since its launch, it has attracted 7000+ retail and institutional participants from 74 countries.
- Polymath
Polymath is a platform that enables the complaint issuance of equity, debt, and fund tokens with KYC and investor rights. It provides users with the tools needed to create and manage compliant security tokens using the ST-20 token standard on its own Polymesh blockchain.
The platform also provides the infrastructure for profit-sharing, dividends, and legally recognized ownership. Currently, it powers over 150 security tokens, including fund shares and real estate-backed assets.
- SPiCE VC Token
SPiCE VC Token represents limited partnership (LP) shares in a venture capital fund. The issuing company, SPiCE Venture Capital, has tokenized access to private equity VC funds to enable blockchain-powered transparent ownership and profit participation.
Profits are distributed periodically, with token holders receiving a share of profits based on net asset value (NAV). It complies with Regulation D and Regulation S, which allow the VC fund to offer securities to US and global investors without complete SEC registration.
- tZERO Token
tZERO is a fully SEC-compliant security token issued by tZERO Group, a subsidiary of Overstock. It represents equity rights in the subsidiary with a dividend-sharing model. Token holders are eligible to receive quarterly dividends (up to 10%) of adjusted gross revenue.
- DBS Digital Bonds
This is a digital bond issued and traded on DBS Digital Exchange (DDEX). It was created by DBS Digital Exchange as a fixed-income instrument offered in $10,000 blocks and provides a 0.6% coupon rate.
Issued in Singapore and compliant with the country’s Securities and Futures Act, DBS digital bonds represent the first bond securities token offering (STO) by a major Southeast Asian Bank.
Utility Token vs Security Token: Core Differences Explained
Utility tokens are crypto assets that grant access to specific services or functions in a blockchain platform or ecosystem. On the other hand, security tokens represent ownership of financial instruments or real-world assets.
Here’s a close look at the major differences between the two:
| Category | Utility Token | Security Token |
| Purpose and Functionality | Grants access to products, services, or network features | Represents an investment in an asset, company, or project |
| Legal Classification and Regulation | Often unregulated or lightly regulated if not deemed a security | Regulated as a security (e.g., under SEC, Reg D, Reg S, MiFID) |
| Investment Potential and Risk | Speculative; value depends on platform adoption and token demand | Backed by real-world assets or profits; value tied to performance |
| Accessibility and Market Listing | Traded on public crypto exchanges (CEX/DEX) | Traded on licensed platforms or private markets; limited access |
| Token Issuance and Distribution | ICOs, airdrops, community rewards | STOs or regulated offerings requiring investor compliance |
| Token Valuation and Price Drivers | Influenced by network usage, utility, and demand | Determined by asset value, revenue, equity, or dividend potential |
| Holder Rights and Responsibilities | Access privileges, staking, limited voting, or governance rights | Legal ownership, profit-sharing, dividends, and voting rights |
- Purpose and Functionality
Utility tokens provide access to a product or service within a blockchain ecosystem. This can be gas, storage, data, discounts, etc. They are central to the working of their respective platforms.
Security tokens represent a financial interest in an asset. This interest can be equity, profit-sharing rights, or ownership rights, and the asset is typically a real-world asset (RWA), like real estate, artwork, bonds, stocks, etc.
- Legal Classification and Regulation
Regulators primarily see utility tokens as cryptocurrencies. Thus, they’re not under as much scrutiny as security tokens, which are classified as securities and must comply with regulations like the U.S. SEC’s Reg D, Reg S, or Reg A+, requiring full disclosure and investor protections.
- Investment Potential and Risk
Utility tokens derive value from platform adoption and transaction volume. If demand for the network’s services grows, so does token value. Nonetheless, they remain speculative because success hinges on usage that may never materialize.
In contrast, security tokens are backed by profit‑sharing, dividends, or equity. This gives them more predictable value drivers tied to real‑world performance, though they carry counterparty and liquidity risks inherent to any financial asset.
- Accessibility and Market Listing
Utility tokens enjoy the complete democratization of access that comes with blockchain technology. They thrive on public exchanges, centralized and decentralized, where anyone can trade them 24/7 with a compatible wallet.
Securities-law restrictions complicate access to security tokens. These assets are confined to licensed trading venues (security token exchanges) or private placements. They usually operate under trading windows and lockup periods and limit participation to accredited or whitelisted investors.
- Token Issuance and Distribution
Utility tokens typically launch via initial coin offerings(ICOs), token pre‑sales, or airdrops to build community and bootstrap network effects. These methods are fast and informal, though sometimes controversial.
Security tokens undergo a lengthy process before they can be traded. They require a security token offering (STO) or compliant private placements, which involve legal counsel, registration statements, and investor‐qualification processes to ensure regulatory adherence.
- Token Valuation and Price Drivers
Utility token prices fluctuate based on user activity, transaction throughput, and network effects. Usually, the more such a token is used, the more it is worth. On the other hand, the valuation of a security token hinges on tangible metrics.
These can be company revenue, profit distributions, asset appraisals, or equity stakes, depending on the underlying asset. They provide clearer valuation models (e.g., discounted cash flows, earnings multiples) but are also subject to market sentiment.
- Holder Rights and Responsibilities
Holding utility tokens grants users some rights based on the platform. You can consume services, stake for network security, or vote on protocol upgrades. However, these tokens don’t give you a direct claim on profits.
Security token holders possess legally enforceable rights — equity ownership, dividend entitlement, voting power in corporate decisions, and potential buyback provision. Nonetheless, they must also adhere to investor agreements, reporting obligations, and transfer restrictions.
Learn More About Crypto and DeFi the Fun Way With Dypto Crypto
Security and utility tokens are only a fraction of the wider crypto ecosystem. Currently, there are over 10,000 crypto tokens circulating, each representing a different opportunity and/or risk. Success in this environment heavily depends on having the right knowledge.
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Frequently Asked Questions (FAQs)
What makes a token a utility token?
A utility token grants holders access to a specific product or service within a blockchain ecosystem, serving as digital fuel or permission rather than an investment instrument. You need it to participate in its ecosystem.
Are security tokens legal in all countries?
No. Security tokens are subject to each jurisdiction’s securities laws. And while some countries permit regulated offerings, others restrict and even ban digital securities entirely.
Can a token be both utility and security?
Yes. Hybrid tokens with utility and security properties exist. In this case, regulators assess the primary function for regulatory purposes. If profit expectations dominate, it’s likely deemed a security despite any utility features.
Where can I trade security tokens?
Security tokens are not traded on conventional crypto exchanges. They can only be found on licensed security‑token exchanges or alternative trading systems (ATS), and via compliant platforms or approved broker‑dealers.
Do I need KYC to buy a utility token?
Depends on where you’re buying the token. On most centralized exchanges, yes, you must complete KYC/AML checks before purchasing an asset. Decentralized platforms don’t require KYC. All you need is a compatible wallet.
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