Security vs Utility

Old School Security Token: The Stock Certificate

[Security tokens vs utility tokens] There seems to a flurry of interest in STOs (security token offerings) lately. In this essay, we shall try to distinguish between security and utility tokens and fathom how STOs might be used.

Game Arcade Analogy
  • Game arcades offer a plethora of games including merry-go-round, basketball hoop shoot, pinball and electronic games.
  • Payment for games is usually via tokens which can be purchased from a token counter.
  • Why use tokens instead of coins? Centralised cash handling, security (not having 50 cash locations in an arcade of 50 games), ease of converting notes including foreign notes, ease in changing prices (eg from 50 cents per token to 60 cents per token) etc.
  • These arcade tokens are an example of utility tokens - one utilizes them to play games at the arcade.
  • On the other hand and completely different, if the arcade operator were to offer shares in the company, the share certificates would be the equivalent of security tokens.
  • [In the old days, shares were issued as paper certificates. These certificates secure (hence the term 'security') the share ownership of the holders of the certificates.]

STO vs ICO
  • STO came about after the SEC looked into ICOs and determined that some or many were offering shares without being regulated by the SEC (and are thus illegal).
  • Consequently, if a business were to offer shares (stock) via a token offering, and it is approved by SEC (have audited accounts etc) then it becomes a STO, an ICO which has been vetted by authorities.
  • Though the one major claimed STO in 2018, tZERO, which raised USD 134 million (MYR 553 million), seems to have run into some headwinds. 1 2
  • It might be more useful for STOs (as a concept) to leave the ICO legacy 3 behind, and be approached from a fintech, proptech or wealthech perspective.
  • A STO should be for a running business with traction and proper accounts, whereas ICOs have largely been based on 'whitepapers'.

STO Use Case
  • Allow the issue of stock to 3 different groups: institutional investors (T20/upper class), retail investors (M40/middle class) and security tokens (B40/working class/newbies/dabblers).
  • Thus, a newbie/bit investor can simply sign up online or on-app and buy a small lot of say Apple stock. Being on a token platform, the platform can define lot sizes, spread of investors (eg. no more than one lot per person) to limit risk, speculation and manipulation.
  • Holders of tokens are entitled to dividends similar to other stock holders, and to (fractional) voting. Can the crowd vote competently on CEO remuneration and other complex issues? Left as an exercise for readers.