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Utility Tokens
Utility tokens are a specialized sort of cryptocurrency token meant to facilitate a certain use case inside a given ecosystem. Utility tokens give users permission to conduct certain operations on a particular blockchain network or decentralized application. Moreover, utility tokens might function as incentives to promote a particular action inside the network. Moreover, utility tokens enhance the user experience through the provision of rewards for unique acts.
A token for a particular decentralized exchange (DEX) can only be used to trade tokens or perform actions on that DEX. These DEX tokens may be awarded as an incentive for platform users or as interest for those who lend money over the platform. Since they can be exchanged for other digital assets, utility tokens are extensively used to generate financing for companies through initial coin offerings (ICOs) due to the global expansion of blockchain networks.
It’s also essential to recognize that utility tokens are exclusive to the ecosystems in question. For instance, the Basic Attention Token (BAT) is an Ethereum-based token that works within the free, privacy-focused Brave Browser web browser that has over 50 million monthly active users. The BAT token’s primary use case is to serve as the incentive mechanism and medium of exchange (MoE) that rewards users, websites, publishers, and content creators without relying on the current default method of surveillance capitalism. Other examples of utility tokens include Chainlink (LINK), Arweave (AR), and FTX Token (FTT) before the FTX collapse. Despite the advantages of these network-specific tokens, which led to their widespread adoption during ICOs in 2017 and 2018, their lack of regulation also resulted in fraudulent cases.
Utility tokens are pre-mined, (usually) manufactured in a fixed number, and distributed proportionally by the project's team. Generally, they’re issued to investors during the initial coin offering (ICO) phase as a means of generating interest in the product or service. Although investors may be able to purchase and use utility tokens as a form of payment on the network to redeem or gain access to a specific service, utility tokens have no promised monetary worth. If the project fails, the utility tokens' value will decrease. Nevertheless, it’s feasible for a utility token’s value to increase in tandem with demand, especially if there’s a limited quantity of tokens.
$LINK Regulatory Example
LINK can be deemed a if it satisfies certain properties based on the common definition and interpretation of the Howey Test, the most common legal test applied to potential securities. The four-component questions of the test are as follows:
- Is there an investment of money?
- Is there an expectation of future profits?
- Is the investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (i.e. invest). However, LINK has a clear utility case on the platform in the form of collateral to ensure accurate and honest data feeds.
The biggest argument for LINK being classified a security, according to the Howey Test, is its dependence and centralization around the “common enterprise” and “third party” parent company, SmartContract. Other tokens created by large centralized companies have recently run into opposition from the US regulators, such as Telegram abandoning its project entirely after a multi-year battle with the SEC. A recent landmark case by the SEC sets a precedent for them to evaluate ICOs as securities retroactively, but this does not affect Ethereum itself, even though it had an initial token sale in 2015.
The Securities Framework Asset Ratings of the Crypto Rating Council (CRC) scored Chainlink a 2 out of 5 in their internal rating system. This score was based on:
- Sale of the token after the system had existing utility
- Absence of investment-like language or marketing
- Decentralized development and usage
Coins with a lower score are less likely to be deemed a security based on the Howey Test, according to their interpretation. The is a private organization whose goal is to assess if a crypto asset, or its development, issuance, and use have characteristics that make it more or less likely to be deemed a security based on the US Howey Test. For comparison, Bitcoin scored a 1 and Ether a 2, thereby illustrating high confidence in LINK’s standing based on current interpretations from US regulatory bodies.
