Blockchain technology opens the door to a whole new level of financial interactions, offering unique benefits that revolve around security, speed, global reach, transparency, immutability, and liquidity, among others.
In this article, we discuss the three main types of volatile tokens, which are security tokens, utility tokens, and non-fungible tokens (NFTs), and see where USPC belongs.
What Is a Security Token?
A security token is a blockchain-based digital representation of a security. In finance, securities refer to fungible (mutually interchangeable) financial instruments that hold value and can be traded on primary and secondary markets. The most relevant examples of securities are company shares and corporate or government bonds.
Entities like government agencies or companies can raise capital by offering securities. These financial instruments are highly regulated.
In the US, the Securities and Exchange Commission (SEC) is the main financial watchdog that monitors the issue and trade of securities. All securities available to public trade must be registered with the SEC and regulated according to the Securities Act of 1933 – which came as a response to the Great Depression of 1929 – and a series of other subsequent laws. The main goals of the regulatory framework addressing securities are to require issuers to keep investors informed regularly as well as prevent fraud and deceit in the security trade.
Everything said above about securities refers to security tokens because that’s what they are from a legal perspective. However, what makes security tokens distinct is their underlying technology. Unlike traditional securities, most of which are represented by paper or digital certificates, security tokens are digital units stored on a decentralized ledger network, aka blockchain. These tokens are digital representations of ownership of underlying assets, such as stocks or bonds.
Technically, security tokens, also known as digital securities, are similar to cryptocurrencies like Bitcoin and Ether, but they are regulated and act as securities.
As of 2022, US regulators, especially the SEC, consider most blockchain-based tokens to be securities, except for Bitcoin, calling for their strict regulation. However, that doesn’t touch upon security tokens because they are already in the purview of securities laws and are, generally speaking of most security token projects, more forthcoming about their being securities in the traditional sense.
At the end of October, Prometheum Ember ATS, a FINRA and SEC-regulated Alternative Trading System (ATS) platform and broker-dealer in digital securities, announced the launch of its ATS, letting users to trade security tokens.
One month before that, INX Digital Company announced a platform designed to enable the trading of SEC-registered digital securities along with cryptocurrencies. Called INX One, the platform will be available to both institutional and retail investors. Last year, INX became the first company to conduct a security token offering (STO) that was registered with the SEC, raising $85 million from over 7,000 investors.
The STO is the main fundraising mechanism used by various entities to issue digital securities. It mixes the characteristics of traditional Initial Public Offerings (IPOs) – through which companies become public by issuing their shares on stock exchanges – and Initial Coin Offerings (ICOs), which represent a crowdfunding mechanism used by crypto projects to raise funds from institutional and retail investors.
STOs are more secure than ICOs and more cost-effective than IPOs.
The main benefits of security tokens revolve around liquidity, programmability, global reach, security of ownership and transactions, as well as convenience.
The main types of security tokens are:
- Equity tokens – these are digital securities backed by equity, such as company stock.
- Asset-backed tokens – these tokens provide ownership rights of real-world assets, including real estate, commodities, and art. They help investors get exposure to non-liquid assets, such as real estate, especially thanks to the fractional ownership feature.
- Debt tokens – debt tokens can represent any debt-related instruments, such as corporate and government bonds, real estate mortgage, and debt cash.
What Is a Utility Token?
Utility tokens share similarities with security tokens as they technically can be the same. However, utility tokens aren’t backed by any real-world assets. Instead, they provide a specific use case on a blockchain network, such as acting as a currency within the ecosystem, offering fee discounts, or giving access to certain products and services.
While security tokens provide holders with ownership rights to a company or real-world asset, utility tokens can be used within its blockchain ecosystem only. Thus, in the former case, the token’s price is dictated by the real-world asset, while the price of a utility token is driven by demand for the blockchain products and services it represents.
Some examples of utility tokens are BNB – the native cryptocurrency of Binance, the world’s largest crypto exchange by trading volume – 1INCH, the native token of a decentralized exchange (DEX) aggregator, and LINK, the native token of blockchain oracle platform Chainlink.
The standard approach to issuing utility tokens to the market is the ICO, which is a form of crowdfunding during which the new tokens are sold to the public to raise capital and increase awareness. ICOs were used by some of the most popular cryptocurrencies, including Ethereum, EOS, Filecoin, Tezos, Bancor, NEO, and Cardano, among others.
Speaking about Ethereum, it can be viewed as a utility token, although the crypto community doesn’t treat it as such.
The popularity of ICOs skyrocketed in 2017 and 2018, during which crypto projects managed to raise a total of about $20 billion.
However, this form of fundraising eventually plummeted because of an increased number of scams. In 2018, ICO advisory firm Statis Group found that 80% of all ICOs were scams, which put the crypto industry in a bad light. Moreover, half of the genuine ICO projects failed within a few months, leaving token holders with a negative return on investment (ROI). Some of the biggest ICO scams were Pincoin, ACChain, Savedroid, and PlexCoin. The ICO hype was so intense that one of the scam projects was called… PonziCoin (what could go wrong?).
The huge number of scams is explained by the fact that ICOs are not regulated.
However, the SEC wants to regulate many of the tokens resulting from ICOs as securities, based on the so-called Howey test, which requires issuers to register the tokens with the regulator.
In November 2022, the SEC won a case against LBRY, a blockchain-based file-sharing and payment platform operating as a digital content network. The most popular app built on its platform is the Odysee video-sharing website. The LBRY Credit (LBC) has been used to reward users for performing certain tasks and contributing to the project.
LBRY CEO Jeremy Kauffman told Cointelegraph:
“The SEC vs LBRY case establishes a precedent that threatens the entire U.S. cryptocurrency industry. Under the SEC vs LBRY standard, almost every cryptocurrency, including Ether and Dogecoin, are securities.”
What Is an NFT?
The void left by the distrust in ICOs has been filled by the rapid increase of decentralized finance (DeFi) projects and NFTs. The NFT boom culminated in 2021, but the market is promising and is here to stay despite a relative decline in sales as of 2022.
NFTs are a special group of tokens that represent something unique and scarce, be it digital or physical. Unlike fungible coins like ETH or BTC, NFTs are not mutually interchangeable. Each NFT has its own value derived from the asset, product, or item it represents. In the case of regular tokens, we wouldn’t care about what particular ETH unit we hold in our wallet since all ETH tokens have the same value, hence their fungibility. When it comes to NFTs, each token is distinct from the rest, even if we speak about the same collection or series of NFTs.
The technical aspects of NFTs open the door to a whole new range of use cases that revolve around ownership, intellectual property, and efficient trading of non-liquid assets. NFTs can represent anything from digital and physical artworks, in-game items, luxury goods, songs, etc.
While NFTs gained some recognition back in 2017 thanks to blockchain collectible game CryptoKitties, their true potential was realized in 2020, when digital artists and game developers started to use them more often to better interact with their audience and offer new features.
In March 2021, digital artist Mike Winkelmann, better known as Beeple, famously sold an NFT representing his artwork called “everydays: the first 5000 days” for an impressive $69 million. Moreover, the trade was facilitated by the British auction house Christie’s, a leading art and luxury company.
While NFTs may reside on the same public blockchain that hosts utility and security tokens, they have their own standard that ensures that each token has a unique identification code and metadata to distinguish it from the rest. On Ethereum, which hosts the majority of NFTs today, the token standard is ERC-721.
Most NFTs are traded on specialized marketplaces. The largest NFT markets today are OpenSea, Rarible, Nifty Gateway, Binance NFT, and SuperRare.
The underlying blockchain and the unique features ensure that NFTs have the following characteristics:
- Indivisible – NFTs are traded entirely and cannot be purchased as fractions.
- Immutable – NFT transactions are immutable, meaning that the information cannot tampered with once the transaction is approved on blockchain. This ensures that the ownership rights are stored safely.
- Indestructible – one cannot destroy or remove an NFT, as it is secured by the blockchain’s consensus mechanism.
- Verifiable – everyone can easily verify the authenticity of an NFT, which helps holders prove their ownership rights.
NFTs empower many artists who can connect directly with their audiences. Elsewhere, game developers can become more creative to make their video games more interactive by integrating NFTs representing in-game items.
Popular fashion brands have also jumped on the NFT bandwagon. Gucci, Louis Vuitton, Prada, and Adidas have all released NFT collections representing prints, physical items, and game assets.
Comparison Between Security Tokens, Utility Tokens & NFTs
Here is how the three main types of tokens compare to each other:
What Is USPC?
Now that you know the key characteristics of the main types of tokens, where does USPC fit into all this?
United States Property Coin (USPC) is a security token that represents fractional ownership of an income-producing real estate portfolio. It falls into the subcategory of asset-backed tokens, being backed by a portfolio of US-based properties.
The price of USPC is directly related to the performance of the portfolio assets, giving investors the opportunity to get exposure to the real estate market conveniently and securely.
USPC is an Ethereum-based token that uses the ERC 1400 standard, which was designed by Polymath to meet the specific needs of security tokens, including compliance, controls and permissions, etc.
Unlike utility tokens and NFTs, offerings of USPC must be fully compliant with federal securities laws and regulations. This gives potential investors increased peace of mind when participating in public and private offerings of USPC.
The portfolio managed by USPC is well-diversified and consists of commercial properties, multifamily housing complexes, healthcare facilities, and hospitality properties. The properties are located in high-demand urban markets across the US. USPC relies on a tested acquisition strategy that aims to provide consistent and predictable returns to hedge against inflation while preventing volatile fluctuations typical for cryptocurrencies.
The token provides investors with fractional ownership of the real estate portfolio, distributing the returns equally based on the number of held tokens. The portfolio’s seed asset is a $10 million luxury multifamily property in Venice Beach, California.
USPC founder Johnney Zhang is CEO of Primior, a leading real estate investment and development firm with more than $1 billion in successfully developed property projects. With a track record as a successful real estate investor, he has the experience and expertise to curate a portfolio of high-quality US-based properties, and according to the USPC acquisition strategy, the plan is to acquire Core and Core+ properties exclusively. This will provide a greater layer of security to investors and help ensure the portfolio’s consistent growth.