The search for alternative financing channels to traditional ones is being enriched by New opportunities thanks to blockchain technology, which provides innovative capital raising tools such as the Utility token. These digital assets function differently from traditional financial instruments and represent a lever rich in potential for raising capital, creating a community of supporters, and acquiring customers. However, to take full advantage of their potential, it is crucial to understand the technical and regulatory mechanisms that govern the crypto-asset market.

In this article we find out. How to use Utility Tokens to raise capital, starting with an in-depth analysis of these digital assets and the various types of operations that allow them to be used.

Utility Token: what it is and how it works

One Utility token is a Digital asset that provides access to specific services, products, or benefits within a specific blockchain network-based platform. Unlike the Security token, does not represent a property right or a financial security, but rather an operational tool: a "digital voucher" to interact with an ecosystem, for example to purchase a good or service offered within it at advantageous conditions or benefit from extra features. Each Utility token, therefore, is valid only within a specific circuit/portal/platform in which it is enabled: this is why they are often compared to food coupons as a mode of use.

Using the blockchain network for the issuance and exchange of these assets allows transactions to be transparent at all times, thanks to encryption and data validation by all nodes in the network. 

Some examples of Utility tokens To understand its operation:

• Ether (ETH), token issued by the Ethereum blockchain that can be used by users to pay transaction fees and execute smart contracts on its network
• BNB, tokens to take advantage of commission discounts and exclusive access on Binance
• GMT/GST, tokens to reward users of the STEPN fitness app who achieve running or walking goals, who then gain access to extra features in the app.

Difference between Utility Token and Security Token

Understanding the difference between Utility Token and Security Token is critical because the two instruments are subject to very different regulations. They are both digital assets, but they represent different things:

• I Security token represent investment instruments such as stocks, bonds, fund shares, etc., and thus confer property and/or administrative rights;
• The Utility token represent only access rights to goods or services of online ecosystems.

For this reason, at least in Europe, Security tokens are considered true financial securities, Utilities on the other hand as digital assets of a different nature, hence the regulatory distinction:

• Security tokens are subject to MiFID regulations and anti-money laundering laws
• Utility tokens fall within the scope of the MiCA (Markets in Crypto-Assets) Regulations., effective from 2023, which regulates the public offering and issuance of crypto-assets in Europe. 

It should be remembered, however, that the line between the two categories can be thin: the nature of a token depends not only on its characteristics, but also on the operational details of the offering document and how it is marketed. This is why a case-by-case legal assessment is essential.

Another key difference is more precisely operational: Security tokens are issued and offered to the public upon authorization by an institutional body, while Utility tokens may not require any external validation. We will elaborate on this by analyzing the different ways of raising capital through Utility tokens.

Why raise capital with Utility token

For a business, Issuing a Utility token is not just about raising capital, but build an entire alternative business strategy around it. Benefits include:

• Alternative financing: access to capital without divesting equity or making debt.

• Market validation: an opportunity to validate a product or service by verifying actual market demand.

• Community involvement: building a participatory ecosystem of highly engaged users who are active in interactions and word-of-mouth.

• Customer acquisition and retention

• Microtransactions: fluid payment for digital services or premium content that incentivizes their use.

How can these advantages be exploited in concrete business strategy? Here are some examples.

Validation and retention through pre-sales and early access to products or services: Offering Utility Tokens that give early access to new products or beta versions of digital services creates a niche of privileged users who feel an exclusive relationship with the company, product or service and allows them to test market acceptance and demand through these early-adopters, while simultaneously raising capital. This is a widely used strategy of gaming and SaaS platforms and by online content producers.

Marketing and Loyalty through Gamification and Rewards: Offering tokens to give access to discounts, rewards, exclusive access levels or premium content that is unlocked when certain actions are performed can become a form of entertainment, which is a great marketing tool for industries such as e-commerce, education, streaming, gaming and many others, and allows customers to be turned into a community of ambassadors and content producers for the promotion of the platform itself.

Transaction facilitation: Allowing Utility tokens to be used as means of payment for microtransactions makes payment processes easier and thus reduces the churn rate of buyers, but also cuts the costs and cumbersomeness of traditional payment circuits. It is a practical way especially for subscription services, pay-per-use, donations, etc.

How to raise capital with Utility Token: ICO, IEO and IDO

There are three main ways of issuing Utility tokens, which have developed over time through successive experiments: Initial Coin Offering (ICO), Initial Exchange Offering (IEO) and Initial DEX Offering (IDO). Let's look at them in detail:

Initial Coin Offering (ICO)

Between 2013 and 2018, the unregulated experimentation of the More autonomous form of capital raising through Utility token: the company independently issues tokens through the chosen blockchain network and sells the tokens directly to users through smart contract that define the terms of the transaction, without intermediaries.

Pros:

• No intermediation
• No geographical limitation 
• Low cost of operation
• No sale of company shares
• Strategic autonomy.

Cons:

• Compliance risks 
• Illiquidity of tokens
• Absence of a secondary market
• Low investor confidence.

Utility token ICOs experienced a real boom between 2017 and 2018, but in the absence of regulation and transaction controls, two types of problems have arisen:

• The multiplication of scams, or nonexistent projects that were not implemented once capital was raised, leaving users with worthless tokens;
• L'illiquidity of tokens linked to startups that used them to raise capital in cryptocurrencies to be later converted into current currency. 

These problems led to a collapse in the popularity and use of ICOs and even cryptocurrencies.

Initial Exchange Offering (IEO)

IEOs have emerged as a more structured alternative to ICOs to solve the problems we described in the previous section. In an IEO, Is an exchange handling the sale of tokens. The company proposes the project, defining the characteristics and purposes of the Utility token it wants to issue, the exchange platform evaluates it, has to approve it, requires a set of transparency and compliance documents from the company, and finally takes care of promoting the campaign on the portal.

The exchange also performs the token listing on the platform, offering a list value and a portal for buying and selling, then creates the conditions for a secondary market. 

Pros: 

• Increased confidence of potential buyers
• Platform support for operations and compliance
• Promotion activities carried out by the platform with its user database
• Token plus liquid. 

Cons:

• Exchange costs and fees for the company
• Less strategic autonomy
• Longer timescales
• Compliance and transparency obligations.

IEOs offer an attractive trade-off between autonomy and market trust, but many companies and users have accused this mode of failing one of the fundamental principles of blockchain exchanges: the decentralization.

Initial DEX Offering (IDO)

Out of concerns about the lack of decentralization of IEOs, IDOs were born, combining elements of ICOs and elements of IEOs: disintermediation and support platforms for sales and the secondary market. 

In practice, the issuance and sale of tokens take place yes on a exchange platform, but decentralized (DEX): The platform in this case has the role of providing the infrastructure for transactions and a secondary market with an official list for trading after issuance, but it does not perform any entry selection or deal with compliance. For token issuance, companies can use a launchpad, special platforms that handle the practical aspects of this operation.

Pros:

• No middleman
• Low cost to the company
• International audience
• Strategic Autonomy
• Secondary market

Cons:

• Technical complexities and management time for the company
• Compliance risks
• Less investor protection.

IDOs are today among the most used models by startups, especially in contexts where the community plays a central role in the project. Whenever we talk about "most used" and "boom," we refer mainly to the U.S. context, because in Europe, but especially in Italy, the use of these ways of raising capital is still limited, both because of a cultural issue and because of companies' hesitation due to regulatory uncertainties.

Utility Token regulations: where do we stand?

With the enactment of the MiCA regulations, the EU has taken a step forward in regulating crypto-assets. The regulation mainly establishes licensing and transparency requirements and operational modalities for platforms that provide crypto-asset trading services, such as exchanges and virtual wallets. The main implications for businesses are:

• Check the nature of the token to determine whether it is among MiCA-regulated assets or among digital assets that can be assimilated to traditional financial instruments.

• Comply with transparency and anti-money laundering requirements, particularly for ICOs and IDOs.

• Pay attention to regulations in investors' countries in case of cross-border offerings.

In Italy, the relevant bodies are Consob and the Bank of Italy, which are responsible for implementing European standards.