Crypto-Token Classifications

Mercury Protocol
Jul 17, 2018 · 4 min read

Introduction

“Token” has become such an overloaded term. There are a LOT of tokens out there, and as the burgeoning crypto-industry matures, it’s critical to make thoughtful decisions regarding fundamentals (like naming conventions) that will be used for years to come. Entities like the Chamber of Digital Commerce have started organizations and devoted teams of expert resources to this end. To that end, today we’d like to spend some time proposing some definitions of token classifications to keep this complex industry simple and clear.

Regulated Tokens

Tokens that are classified as securities, commodities, or any other pre-existing classification of regulated financial instruments are straightforward in their naming. A regulated token that falls under the U.S. Securities and Exchange Commission, for example, would be a Security Token. We won’t spend much time discussing these types of tokens, as the method of regulated token classification is complex and should only be performed by experienced attorneys and regulators.

As a litmus test, if your token can be bought/sold for financial profit, pays dividends, or comes with voting rights, then it’s probably a Regulated Token.

If you think you may have or want a regulated token, please consult experienced counsel. Do not use this blog post or any other public materials to try to classify it yourself, just hire an attorney and thank us later (seriously, it’s not worth it).

Utility Tokens

Where it starts to get a little fuzzy is in the “non-regulated” token space. Historically, crypto-token development teams who don’t want their token to fall under any regulatory regimes would claim that because a token can be used to do something (e.g., execute a smart contract), it has an inherent “utility value that disqualifies it from being a traditional financial instrument that may fall under government regulation. At this point, there is no formal regulator of Utility Tokens, only a distinction between Regulated Tokens and Non-Regulated Tokens. Therefore, as of now a token can have utility and still be a Regulated Token.

Consumer Tokens

Recently, the classification of Consumer Tokens has become popularized as a prospective alternative to Utility Tokens. There is a considerable debate over what specifically constitutes a Consumer Token and whether the classification should replace, augment, or subclass “Utility Tokens” (here’s a public Google-Doc managed by ConsenSys debating how to classify them).

  1. A Consumer Token must not be a financial vehicle. This means it has a fixed price point in fiat and is not traded on an open market, while Utility Token may be traded on an open market.

Conclusion

There are many other classifications of tokens we did not touch on in this post, such as asset tokens, collectable tokens, reputation tokens, etc., that we may revisit in a future post. As everyone gains more clarity on the real world usage and best practices surrounding crypto-tokens, we’re excited to see the industry mature and continue exploring self-regulation, which starts with a shared vocabulary around these complex topics.

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