The term digital currency was frequently used in the early days of the cryptocurrency market. Nowadays, most people refer to all these new units of value as cryptos. But, different cryptos serve different purposes. Therefore we have to analyze the different types of cryptos in the current market to determine what they represent.
Currencies / Commodities Tokens
First, there are the major cryptos such as Bitcoin and Litecoin. Currently, there are two schools of thought on these. Either they can be classified as currencies or commodities. Different countries have classified them as one or the other. Deciding on how to view cryptos presents a great challenge for governments. As an example, the United States currently views cryptos such as Bitcoin and it’s forks, as a commodity. On the other hand, Japan classifies Bitcoin as legal currency.
In order for Bitcoin to be a good currency it needs to have three functions: medium of exchange, unit of account and store of value. The function which makes it hard to be used as a currency is that it is very bad as a unit of account. It makes it very difficult for a merchant to list a price in Bitcoin or Litecoin because it’s value against local currencies is extremely volatile. One pound of apples can be one price today and a very different price tomorrow.
Utilities Tokens
A simplified way to think of utility tokens is as tokens used at an arcade. They only represent access to the machines which the business owns but these tokens do not represent any equity stake in the business itself.
When looking at utility tokens, a couple of good examples to look at are OmiseGo and Cindicator. Both of these projects are built on the Ethereum blockchain using the ERC20 token standard. OmiseGO is an open payment platform and decentralized exchange and Cindicator is a collective intelligence platform for financial markets.
What makes them utility tokens?
OmiseGo is building the network which will act as an infrastructure for the transfer of units of value (fiat, cryptos, airline points, etc). In order to secure the network OMG holders will have to stake their coins and run a full node. Without the use of the OMG token the platform will not be functional.
The Cindicator app rewards users for making predictions of future events and prices in financial markets by giving the top performers CND tokens. On the other end of the equation, they provides the answers of the predictions to traders. This information gives the traders an edge in their trades. In order to receive prediction results, before they go public or for them to have access to other services the company provides, they must lock up a set amount of tokens in their wallet.
Securities Tokens
Blockchain Capital is the company that pioneered the first tokenized fund. They were also the first company to register their ICO (initial coin offering) with the SEC as a security token offering. Another project that is preparing to do a crowdfunding round via a securities token offering (STO) is Miami Crypto Exchange under the ticker MCEX. This will revolutionize the securities market by increasing liquidity of private companies’ shares. Also, do to the transparent nature of public blockchains, regulators will be able to easily track foul play in the market.
What makes them securities tokens?
Traditionally, when private companies raise funds, they give out share certificates. These documents represent the investor’s ownership in the company. In order for these companies to legally raise funds in the United States, they have to be registered with the Securities and Exchange Commission (SEC). This procedure was put into place in order to protect investors. The same rules apply to companies that want to raise money using the new crowdfunding method called ICO (initial coin offering) which has more recently been renamed STO (securities token offering). STO are not as popular at the moment. But as the technology and regulations advance, security token offerings will become the new standard in fundraising.
While most countries do not have an established framework for categorizing different crypto assets, it is safe to say that this is a subject on many regulators’ and entrepreneurs’ minds. Once the framework is established, we will experience a financial evolution unlike which the world has ever seen before. The path ahead of us is not an easy one. But, with enough time and as this young market reaches a higher level of maturity, we will see the true potential of these crypto assets.
