The gold rush of cryptocurrencies has created a new class of billionaires, digitally rich from having foresight into a world-changing technology: blockchain. The big question, then, is what’s next? As the worlds of technology and finance continue to innovate, markets will turn their attention to the security token. The new asset class promises to bring the cryptocurrency trend to a wider pool of investors who want real-world value behind the digital assets in which they invest.

So what’s the difference between a security token and a utility token, such as Bitcoin? Utility tokens are designed for use in a digital marketplace. Since many initial coin offerings launch before the marketplace has been built, utility tokens represent only the promise of a future value. Utility tokens, also called user tokens or app coins, represent future access to a company’s product or service.  By creating utility tokens, a startup can sell “digital coupons” for the service it is developing, much as electronics retailers accept pre-orders for video games that might not be released for several months. Filecoin, for instance, raised $257 million by selling tokens that will provide users with access to its decentralized cloud storage platform. Security tokens, by contrast, have real-world assets backing them up, such as equity in a company or in real estate. If a crypto token derives its value from an external, tradable asset, it is classified as a security token and becomes subject to federal securities regulations.

Because the term “ICO” is a derivative of “initial public offering” (ICO), utility token creators usually refer to these crowdsales as token generation events (TGEs) or token distribution events (TDEs) to avoid the appearance that they are engaging in a securities offering.

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