What is a utility token?

One of the questions often asked about tokens issued in an ICO is this – are they a security or utility token? We’ll answer that question here.

Let’s deal with what is considered a security token first. This is based on a report on DAO Tokens issued by the U.S. Securities and Exchange Commission (SEC) in 2017. It decided that DAO tokens were securities and were therefore subject to federal regulations for this asset class. A security is a tradable financial asset and stocks or bonds are typical securities.

In the ICO arena to date, it has often been challenging to define whether a token is a security, or something else. Tokens perform so many different functions, such as currency, asset, company share, method of payment and many others, and untangling the functions has caused some headaches.

However, there is one way to distinguish between what is defined by the SEC as a security token and a utility one. When you buy a security, you transform money into capital. Security owners are promised profit and dividends. Plus, it is typically something you never physically possess.

A security token in the ICO arena is one that is equivalent to a company share and owners will expect to share in the company’s profits.

By contrast, a utility token gives owners access to the company’s products and/or services. As the name ‘utility’ suggests, these tokens have a ‘use factor’. And utility tokens are exempt from securities regulations.

However, a utility token can still bring profit as well as a practical use case to its owners. These tokens have the potential to increase in value if demand for the company’s services rises. Most often the company offering a utility token is answering a ‘real world’ user need, like making payments, or getting a loan.

Lendo’s ELT is a utility token

Lendo’s ELT token is a good example of a utility token. It demonstrates all the characteristics of a use case, because owners can use it to pay for storage fees when they deposit their crypto collateral for a fiat currency loan. It can also be the crypto collateral for a loan. And, ELT owners will realise a quarterly profit from vault fees, as well as a potential rise in the value of the ELT token over time.

Lendo also answers a ‘real world’ problem; it offers crypto owners the ability to obtain a loan for whatever they need without having to sell their cryptocurrency and sacrifice any potential profits when their crypto assets rise in value.




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