What is it about?
The term token in context always causes confusion and misunderstanding. The term is often used as a synonym for cryptocurrency or altcoins.
Therefore, a differentiation should first be made at this point.
Cryptocurrency
This is the standard currency of a particular blockchain in which payments can also be made. As is increasingly known, Bitcoin is the first cryptocurrency that is based on a blockchain and can be used as a means of payment. However, Bitcoin is neither a token nor an altcoin.
Altcoin
To put it very simply, all currencies that came after Bitcoin were created. Mostly with the idea of implementing a significant advantage over Bitcoin or based entirely on other users or business cases, such as smart contracts.
There are now several thousand of this type. See also Altcoin.
Token
Unfortunately, the term token is not clearly defined in the context of cryptos, respectively there are different definitions that apply. We have decided to use the following one.
Definition
Tokens are crypto-assets that run on the blockchain of other cryptocurrencies. Their uses are broader than those of a coin. On the other hand, coins have a standalone and independent blockchain.
They exercise functionalities and have rights associated with them, and they can be traded but also held. In addition, the following statement may well be made. A cryptocurrency can be a token but not every token is automatically a cryptocurrency.
A well-known example of such a token is the ERC20 token which is based on the Ethereum blockchain.
The main types of tokens
DeFi Tokens
are currently still mainly formed on the Ethereum blockchain and are used in the context of decentralized financial products. Their goal is to replicate the function of traditional financial systems (loans, insurance, trading, and also saving)
Examples: Aave (allows to lend and borrow cryptos), STX (allows to stake Bitcoins)
Governance Tokens
are special DeFi tokens that grant the holder certain governance rights, mostly co-determination rights. This means that holders of these coins have a say in the design, future functionalities, and areas of use as well as other topics.
Projects that use such tokens are decentralized and this means that there is no centralized board or steering committee. Owning these tokens gives you voting rights. The more tokens you have, the more important your voting rights are.
In most cases, these tokens are those that fall under the category DAO.
DAO means nothing other than Decentralized Autonomous Organization. As the word already describes, the controlling organization in most cases consists of the users who also own these tokens. Thus, the original purpose of decentralization in connection with a token is taken into account and the right of co-determination within the community is also decentralized. An analogy would result here, for example, in comparison with voting shares.
Examples: UNI (UNISWAP), MKR (Maker), DASH (DASH)
Utility Tokens
This type of token is mostly used for a very specific purpose. Most often, they serve the purpose of being exchanged for a specific good or service. For example, you need a certain number of utility tokens to get into a so-called inner circle of a community and use its services. Utility tokens form the largest class of issued tokens, which are issued to interested investors within the framework of the so-called ICOs. They are also issued by companies to facilitate interest and also access to the products offered to the public.
As there is no detailed and formulated regulation for utility tokens yet, special caution is advised with this group of tokens.
One of the biggest misconceptions in the context of utility tokens is the fact that these tokens increase in value. This is not the case with most tokens of this class. However, it is possible that a token that is used in the context of DApp applications may increase in value over time. This is the exception and must be evaluated in advance.
Security Tokens
In the context of blockchain technology, the term should not be considered with the security token as it is used in the context of security assurance for access to a sensitive network system. The Security Token is purely an investment token or rather an equity token. It is a cryptographic token that represents a share. This security can be equated to a share in a company.
The buyer of such a token will therefore receive nothing more than a share in the company which is represented in the form of a token. Of course, he also hopes that this token will increase in value over time. A significant difference between these tokens and a share is that the token is distributed and managed via blockchain technology. Security tokens are subject to regulatory requirements by governments. A good example is the SEC (Securities and Exchange Commission) in the U.S., which is responsible for regulatory compliance in the context of securities.
The SEC has become more and more active in the field of cryptocurrencies in recent years because until now there have been few regulatory provisions for the crypto space and investments made in this area are not regulated enough in their view.
One of the most important questions that are always asked about cryptocurrencies, is actually the question of whether and especially when it is a cryptocurrency or it is a security. This is where issues such as taxation, transparency, and security for investors come into play. Also important is always the question of when a token can be subject to the regulations of the SEC and which cryptocurrencies fall under the sovereignty of the SEC.
In this context, the name Howie Test is often mentioned, a method used in the USA to determine whether a security is subject to the regulatory requirements for a security or not.
This SEC came more and more into disrepute in the crypto community in connection with the debacle around Ripple which made very big waves in the media. The SEC tried to prove that Ripple is a token that is similar to a value parcel and was not able to prove this until now. The SEC is always taking action against crypto projects with more or less success.
At this point, however, it should be noted that regulation of the crypto space is not a bad thing and ultimately also serve to protect investors against fraud and ensure transparency for all participants in this area. However, the action of the SEC is sometimes not quite professional and objective and suggests something else as the goal of the actions, then the actual reason put forward and made public.
Asset-Backed Tokens
Refer to tokens that are backed by a real value or can even mediate. Examples of this are topics relating to real estate. This means that you can hold shares in real estate securitized by a token.
This also includes all the NFTs (Non-Fungible Tokens). By definition, these are cryptographically unique, indivisible, irreplaceable, and verifiable tokens that represent a specific object, whether digital or physical, in the blockchain. Such an NFT exists exactly once only. Such tokens are usually also managed via smart contracts.
Legal issue
The legal issues are, of course, always governed by the rules, practices, and laws in force in the country or region concerned. However, the 3 points below can be used as a general guideline for an initial assessment of the situation.
Cryptocurrencies
Monetary property presupposes that a means of payment is subject to compulsory acceptance. However, this is not yet the case with cryptocurrencies. This is despite the fact that some of cryptocurrencies are already accepted as a means of payment worldwide.
Utility Token
Legally regularly compared to vouchers as they are used to exchange for certain goods or services. Here, however, the underlying provision must be clear. There are also utility tokens that entitle the holder to a return or represent a bond and therefore have the character of a security.
Security Tokens
If a security token is a security-like interest in a company, it is normally also subject to the relevant securities law.
