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Utility Tokens

A utility token provides a user with a product or a service. Utility tokens act as a gateway to allow users access to a network, or allow users to have their voices heard on a network through voting. Utility tokens generally avoid taxes and can be easily confused with security tokens. In order to differentiate between utility and security tokens, tokens must pass through the Howey Test, which analyses the following questions:

  • Is there an investment of money?
  • Is this investment into a common enterprise?
  • Is there an expectation of profit for the investors?
  • Is this expectation of profit based on the work of others?

Utility tokens must not fall within any of these categories, and when a token meets any of these categories, it will be deemed to be a security token. Utility tokens are also unregulated, which can often mean that they may be prone to scams, or cyber attacks

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