Understanding Cryptocurrencies — Different Types and their Usages
Cryptocurrency tokens can be defined by their function and usage as belonging to one or more of several different categories. At the moment, these categories are more of a guideline rather than a concrete, universally accepted construct. Two government institutions seeking to change this are the US Securities and Exchange Commission (SEC) and the Swiss Financial Market Supervisory Authority (FINMA).
The SEC is focused on comparing tokens with securities and defining where the line between the two should be drawn for legal purposes. On the other hand, FINMA focuses on the economic function and purpose of the tokens. Despite this difference, both groups have identified the same 3 key categories for all tokens (but have noted that it is possible for a token to belong to more than one at a time). The three of these are as follows:
1. Payment Tokens
2. Utility Tokens
3. Asset Tokens
As the crypto market becomes populated by an increasingly diverse array of tokens, it is becoming more important than ever to understand the main differences between these categories of tokens in order to make better investment decisions.
Payment Tokens (FINMA) / Cryptocurrencies (SEC)
Payment tokens or “transactional tokens” are simply a type of digital currency. Much like with fiat currencies such as US dollars or the Euro, this type of token is explicitly used to purchase goods or services. However, unlike fiat currencies, no governments are tied to the creation of these tokens.
FINMA defines these tokens as :
“synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.”
The most popular payment tokens on the market now are Bitcoin (BTC), Litecoin (LTC), and Monero (XMR), just to name a few.
Utility Tokens
The creation of Ethereum and smart contracts led to the birth of utility tokens. Utility tokens are tied to a particular platform and enables users to purchase goods or services from that specific network.
FINMA’s take on utility tokens is as follows:
“tokens which are intended to provide digital access to an application or service.”
One of the most famous utility tokens today is Filecoin (FIL). Last year, their ICO broke the record for the biggest token sale ever, raising more than $250 million USD. To use Filecoin’s decentralized storage solution, a user must first pay a small sum of FIL tokens.
Bincentive’s token (BCNT) is also a utility token
and like Filecoin, is how the processing of our service begins. BCNT is required to initiate smart contracts with investment advisors and thus allows users to participate in the following of their expert trades.
Asset Tokens (FINMA) / Security Tokens (SEC)
In short, asset tokens or security tokens, are basically a digital representation of a physical asset. For example, an asset token could be tied to real estate or to precious metals such as gold and silver. It could also represent something like stocks or even intellectual property.
FINMA explains asset tokens as:
“assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.”
Compared with payment and utility tokens, there are significantly less successful ICOs having security tokens. Blockchain Capital (Bcap), founded by Brock Pierce, Bart Stephens, and Bradford Stephens, is believed to be the very first company to provide a public offering for a security token. As such, it is among the more popular security tokens to pay attention to this year.
The Takeaway
Crypto tokens are a malleable device used to perform a variety of functions. The US and Swiss governments have attempted to create parameters which can be used to define these tokens and the results of their efforts were the aforementioned three categories. In studying ICOs, both organizations also realized that many tokens shared elements of more than one category, thus making them belong to both.
Moving into the future, this issue will transform into a legal tightrope walk for ICO companies looking to dodge regulations put in place by both the SEC and FINMA. At the same time, investors seeking to back an ICO will need to pay even closer attention to the team’s strategy in dealing with ICO and security legislation.
Investors also need to understand the associated value driving the usage of each token. Utility tokens are the backbone of a new decentralized way of creating services for all sorts of industries. Security tokens are the beginning of the digitization of physical assets. These various token types are completely redefining the way we think about money, and by learning how they generate value for people, investors can make wiser investment decisions.
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This article expresses an independent view of Bincentive. Bincentive is not responsible for investment profits and losses, and investors should carefully consider various investment risks.
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