Introduction to Crypto Tokens — Meritt blog series #1
Crypto tokens have been introduced a long time ago — Bitcoin was launched in 2009 and it was not even the first token in the space — but only the recent past has seen a Cambrian explosion of tokens appearing on the market, some as the native token on their own chain, similar to Bitcoin, but most of them are currently managed on the Ethereum blockchain.
The concept of a token is highly generic and flexible, and there are many different types of tokens around. Everyone looking at this space will for example have come across the distinction between utility tokens and securities tokens where the former are loosely speaking tokens that are needed when participating in a certain network, whilst the latter one are tokens that are meant for investment purpose. There is an overlap between the two: just like fiat currencies can be bought for the purpose of speculation and investment, people can buy utility tokens for the purpose of investment rather than for participating in the network.
Whether or not a utility token is also a security token is ultimately a question that will be decided by the governments, courts, and regulators of the jurisdiction where the token has been issued and/or where the investor holding the token resides. It is an important question as there are many implications that flow from this classification, for example how and to whom that token can be sold, and what the tax implications of buying, selling, and holding the token are. To give an example: if a token is classified as a security token it usually needs to be registered with the regulators, there are certain marketing restrictions and certain documentation must be prepared, and every purchase and sale gives rise to capital gains tax liability. This last point is absurd: if a token is classified as security, every time someone buys a coffee at Starbucks this token sale must be matched against a token purchase, and needs to be remembered for the consolidated statement of capital gains needed for the year end tax returns.
This well-discussed distinction between utilities and securities tokens however masks the much bigger differences that exist in the token universe: whether or not they are an investment is just one aspect, but there are many others. We at Meritt believe that in the future a lot of the world’s interactions will be intermediated by tokens — which is why we are building a platform that, if everyone goes to plan, will allow everyone to create and distribute their own tokens, mixing and matching exactly the characteristics they want, without the need to engage in complex programming or deployment activities — everything is meant to be done via either a dapp-based front end, or via an API.
We have done a lot of work with internally and with our advisors to map out the universe of possible tokens so that we can design our protocol right from the ground up. In this series of posts we want to share the results of this exercise with you — we will discuss one token or token aspect at a time, and we will conclude with an overview over the entire universe we’ve discovered so far. I hope you enjoy this journey through the world of crypto tokens with us!
Hicham Errafass is Co-Founder of the Meritt protocol. He is a seasoned finance & Blockchain professional. At GE Capital in London, Hicham led corporate financings and restructuring of underperforming financings. Over the last years, Hicham has been supporting the development of Blockchain and fintech start-ups as an advisor. Since September 2017 he is fully dedicated to the development of the Meritt protocol.
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