Tokens are broken down into two subcategories in the blockchain industry, These are, utility tokens and security tokens.
Security Tokens are in essence, cryptographic tokens that can pay the owner dividends, entitle them to a share of profits, pay them interest, or, they can be used to reinvest into other Security Tokens.
There is a prerequisite to qualify a crypto token as a Security Token. As a requirement, the token must pass the Howey Test, which was set out in the case of SEC vs Howey (1946) in the United States.
This means that if the token aligns with the following rules, it will be considered a security token:
-It involves an investment of money.
-The investment is in a common enterprise, where there is more than one investor.
-There is an expectation of turning a profit from the works of either a third party or the promoter of the token.
Security Tokens, generally garner their market value from an outside, asset that is tradable. Because these class as securities, regulations apply to them and a breach in regulations will leave the offerer exposed to potential liability.
Security Tokens are backed by outside assets that give them an intrinsic monetary value as soon as they are issued. This is in contrast to the use of a regular, utility token, where the actual value is based on speculation until a platform is developed and marketed for it.
In essence, the model of using a security token makes the process of raising capital for your project, look less like a Kickstarter page and more like a professional stock that is for sale.
Then, you also have utility tokens. When an investment opportunity in the blockchain market does not class as a security, utility tokens are provided to the investor. These tokens will provide the owner with both a product and a service.
Utility tokens can also confer different rights upon owners, such as the below:
-They can give owners the right to use the blockchain network.
-They can give the owner voting rights with the network.
-Because of the fact that the supply of tokens is limited, they may eventually increase in value.