Advertisements
Crypto Alphabet

Three types of crypto tokens

There are well over 2,000 cryptocurrencies on today’s market, and almost all of them fall into one of three token categories: currency, utility, or investment.

Each group requires different rules and regulations to ensure their issuance and exchange is above board with government regulators.

Depending on the country, cryptocurrency startups may have to register with regulators, and rules for investors may vary with each type of token.

Currency tokens

This is the original form a blockchain-derived token can take. Tokens can be classified as currencies if they were created entirely as a means of payment for goods and services external to the platform running the token.

For instance, Bitcoin (BTC) is seen as a currency as it was created with the intention of replacing fiat money. As such, Bitcoin holders are able to use their Bitcoin to purchase goods and services from shops, online retailers, and other merchants.

Utility tokens

These digital assets are created to provide investors with something other than a means of payment.

This typically comes in the form of access to a particular product or platform. For example, many cryptocurrency exchanges have issued their own native cryptocurrencies for customers to use to reduce trading fees.

The primary difference between a currency and a utility lies in the fact that holding an utility token gives access to a function provided directly by the businesses who issued it.

Most tokens created on blockchains (like Ethereum) are essentially utility tokens, as each one is intended to be used natively on a single platform, such as a decentralized app (dApp).

Investment/asset tokens

Investment tokens are perhaps the most complicated to classify. Inevitably, most become securities in the eyes of financial regulators like the SEC and FINMA.

Tokens found in in this group are the assets that promise a positive return on their investment (besides profits generated from rising market prices).

Such returns are usually distributed by the platform itself or the company that created it.

The most famous example is the MakerDAO – an autonomous, smart-contract powered blockchain organization that reinvested profits from its ICO to generate more profit for holders.

This was deemed to be the critical factor that allowed the SEC to classify the digital assets issued by MakerDAO as investment tokens (and by extension, securities).

Advertisements