What Is a Utility Token?
In the world of cryptocurrencies, utility tokens refer to tokens that are created on a blockchain and have a specific purpose and utility within a particular platform or ecosystem.
Unlike securities, utility tokens are not considered financial instruments and are subject to different regulations.
Distribution and Role of Utility Tokens
Utility tokens are typically distributed during initial coin offerings (ICOs), initial decentralized exchange offerings (IDOs), or initial exchange offerings (IEOs), where investors can acquire them in exchange for cryptocurrency or fiat currency.
These tokens are used to incentivize users to participate in the platform and power its operations.
For example, holding a certain amount of utility tokens may be required to access certain features or activities on the platform.
They can also be used to reward users for completing tasks or providing services.
Defining Utility Tokens
It’s important to note that utility tokens are limited to the specific ecosystem they are designed for.
They are not intended as investment vehicles.
To determine whether a token is classified as a security token or a utility token, regulators such as the Securities and Exchange Commission (SEC) use the Howey Test.
Utility tokens are not subject to the exact regulatory requirements as security tokens because they are not considered investment contracts.