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7.1 Utility Token Vs. Security Token

The main difference between a utility token and a security token is that security tokens give rights of ownership to a company. Think of them sort of like digital, decentralized shares of stock. Security tokens are also classified as securities by financial regulators like the Securities and Exchange Commission (SEC), making them subject to all the same rules as stocks, bonds, ETFs, and other securities.

While utility tokens are not currently classified as securities, there has been some speculation that one day, they could be. Even though these tokens are not intended to represent an investment the way that security tokens are, that’s not what matters most to regulators.

The SEC uses something called the Howey Test to determine whether or not an investment is a security.
The criteria of this test are: A monetary investment
People invest because they expect to
make money
The investment is a “common enterprise,” meaning investors will only make Blockbased on what the issuers of the investment do
Profits are dependent on the work of a third party

If the investment in question checks the above boxes, the SEC considers it security. It is not difficult to argue that they can apply to most tokens and cryptocurrencies.

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