Utility token

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Utility token is a type of cryptocurrency token issued by a decentralized finance platform (blockchain) to provide its users with access to specific functionality and benefits. Utility tokens can be bought, sold, or exchanged for targeted use within a specific ecosystem.

Features of utility tokens

Utility tokens are usually issued through an Initial coin offering, Initial DEX offering, or Initial exchange offering, where investors can acquire them in exchange for crypto or fiat currency. They are used to incentivize users to utilize the platform ("loyalty program") and play a crucial role in the network's operation. For example, token holders with a certain amount of tokens may have the right to participate in blockchain development voting or gain access to unique features. Utility tokens can also be used as units of user rewards for performing actions or providing services on the platform[1].

The use of utility tokens is limited to the specific platform for which they are intended. For instance, the BTT token operates within the ecosystem of the Bit.Team cryptocurrency exchange. Utility tokens are not intended for use as investments since they do not grant ownership stakes in the issuing company's assets[2].

Essentially, a utility token is nothing more than a digital coupon that allows you to utilize certain rights, services, or privileges within its blockchain.

Key functions of utility tokens

The functionality of utility tokens within their ecosystems is quite broad:

  • Internal currency. Used to purchase services or goods on the platform.
  • Loyalty program. Provides token holders with access to unique features or benefits, as a Loyalty Points.
  • Discount mechanism. Enables the reduction of service rates or transaction fees.
  • Payment of fees. Compensates for transaction processing or other network processes.
  • Staking in governance. Allows token holders to participate in blockchain decision-making through voting.

Risks associated with utility tokens

The U.S. Securities and Exchange Commission (SEC) continuously monitors new tokens entering global listings. The regulator employs the Howey Test to determine whether a token qualifies as a security token or a utility token.

Although many projects refer to their tokens as utility tokens and effectively use them as such, the Howey Test may classify these tokens as securities, potentially subjecting their issuers to accusations of violating U.S. tax legislation. This occurred, for example, with Binance Coin, which is used for fee payments, purchases, and discounts on the Binance exchange[3].

See also


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