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Defining the 3 Token Types

Basics Blockchain

The debate on what words apply with regards to tokens: their definitions and their potential legal ramifications, still rages on.

And, unfortunately, it doesn’t feel much nearer to resolution for now. That said, many innovative entrepreneurs are forging ahead and taking advantage of this new world of technological change.


How Blockchains Are Changing the Game

The demand for, scale of and speed with which the Initial Coin Offering (ICO) market has grown has completely caught most governments and industries on the back foot. VC’s face the real prospect of their oft-described “predatory” business model being seriously challenged.

For government regulators like the SEC, it has meant a scramble to understand the market and ensure that citizens are protected.

This isn’t without reason. Here are some of the numbers in discussion:

  • Filecoin has raised $250m (and counting…)
  • In July Tezos raised over $230m
  • EOS has raised over $180m (and rising…), and
  • In June Bancor raised over $150m

Recent SEC overtures about considering ICOs as securities could be a blessing in disguise. It legitimizes ICOs as a real, new way for start-ups to raise funds as well as highlighting the need for a regulatory framework.

Below is a summary of the 3 distinct types of tokens that currently exist.

Before that though, remember that whether these tokens classify as securities is still up in the air – speak to your lawyers for a better shot at clarity.

1.    Cryptocurrencies

Cryptocurrencies/coins (like bitcoin or Litecoin) are digital currencies which employ encryption techniques to:

  • regulate new units of the currency being formed, and
  • verify funds having been transferred

These coins operate without a trusted third party such as a bank.

Judging from rumblings in places like Russia, the UK and at the IMF, there’s a strong possibility that your local fiat currency may become a cryptocurrency. The difference here, though, is that the central bank will be the third party.

Singapore’s a step ahead and have started with their Ubin project.


2.    Utility Tokens

As the name suggests, utility tokens have some kind of utility in the ecosystem they were created for.

To illustrate, when you go to an arcade, you can often buy tokens for the machines with your fiat. Those are utility tokens, as you’re purchasing the right to use services within the arcade’s little economy.

Utility tokens are a new way to fund projects where the infrastructure is open source and wouldn’t have been able to attract capital before.

To facilitate the building of these ecosystems, some tokens are often “pre-mined” before being sold in “crowd-sales” during the token launch.


3.    Tokenised Securities

Tokenised securities act just like shares in the business.

The SEC stipulated that any token that DOESN’T pass the Howey test is considered a security and thus falls under the 1934 Security Exchange Act (it’s a 371-page thriller).

What’s the Howey Test? It asks the following questions:

  1. Is it an investment of money or assets?
  2. Is the investment of money or assets in a common enterprise?
  3. Is there an expectation of profits from the investment?
  4. Does any profit come from the efforts of a promoter or third party?

t’s that last question that’s the trickiest…

Basically, you have to establish whether or not any profit that comes from the investment is mostly outside of the investor’s control. If it is, then it’s probably a security.

This means that even a utility token could technically be a security because they can be traded on an entire host of exchanges.