DeutschSince the introduction of Bitcoin, a lot has happened in the field of so-called crypto tokens. The popular Initial Coin Offerings (ICO) no longer only include pure cryptocurrencies such as BTC, Ethereum or Ripple. Several new variations have emerged over time. These different variants are the subject of our analysis of the various types of tokens. In this way, interested readers get a reliable and transparent impression of the range that the token sector currently covers.
Investors Need to Know What They are Getting Into
Knowledge of the different types is important in several respects. On the one hand, investors in spe naturally have different preferences when it comes to risk appetite and expected returns. Not every token fan wants to invest in high-risk products. In addition, there are legal framework conditions to be taken into account. Even if to date only a few countries can boast clear rules and regulations for Initial Coin Offerings (ICO). Nevertheless, you should keep an eye on legal points. ICOs can be planned in various ways – this is ultimately not only relevant for potential publishers of their own tokens. It is also undoubtedly important for investors to know which token is characterized by which opportunities and technological properties. Not to mention risks, which must also be taken into account.
Possible Providers Must Take Legal Framework into Account
Issuers – i.e. the publishers of a token – must in particular deal with the legal framework conditions of the different versions. No wonder that rich specialist literature on ICOs and Blockchain Technology has emerged over the years. This is about the “typology” behind the various tokens. Experts categorize ICOs into a few types so far, although not all insiders agree on the exact number of categories. This is also due to the fact that new products are constantly being created through the further development of technologies between Bitcoin and Ripple.
Model 1: Digital or Cryptocurrency from Ark to Zcash
Investors who are interested in more or less fast return opportunities like to use this “classic”. Bitcoin, Ethereum’s Ether or Ripple’s Token XRP are three of the best-known examples of a virtual currency or token. The units of the tokens are stored in a digital wallet. These tokens are characterized by their independence from traditional banking systems of central banks; the latter define the equivalent value of the “real” currencies for fiat money. Digital money is ultimately valued within the respective community of system participants. In addition to developers and buyers/sellers, trading venues and exchanges that offer virtual currencies are also involved.
Real cryptocurrencies as a means of payment have no relationship to legal currencies.
Nevertheless, the tokens are often traded against these (e.g. the US dollar or the euro). Differences in cryptocurrencies as a token area present themselves, among other things, with regard to acceptance. Bitcoin, for example, can increasingly be used for payments in online shops, while other tokens are still more commonly used for payment transactions in niches. Privacy Coins such as Monero, for example, have the reputation of being particularly popular with users of the “DarkNet”. The tokens are united by the fact that the so-called “intrinsic value” is missing, as this would be set by a state or currency guardian such as the FED or ECB. The decisive factor is supply and demand on the market.
Cryptocurrencies as tokens are generally characterized by the following advantages over established systems:
- faster execution of transactions (even worldwide)
- lower fees than with many traditional payment options
- even larger transactions within a very short time
- no limits on transactions
The disadvantage, of course, is that the vast majority of tokens of this type still lack greater acceptance in the “real” world. State regulation could change the situation positively. However, users appreciate the (more or less actual) anonymity that is provided by the systems.
Model 2: Special Case Stablecoins
Tokens of this type are now also available in the banking sector, including the US bank JP Morgan Stanley with such an offer on the market. Stablecoins are models that are issued linked to one or more “real” values. The JPM Coin is linked to the US dollar exchange rate. According to the current status, Facebook’s Libra is to be introduced linked to a basket of currencies. This link to fiat money or gold is intended to ensure greater price stability. There are increasing rumors in specialist portals that states such as the USA, China or the EU community are working on the development of their own digital currencies. The “Digital Dollar” would be closely linked to the current dollar exchange rate as a stablecoin, China’s plans, according to current knowledge, would be the Digital Yuan with a corresponding link to the exchange rate of the traditional state currency Yuan.
Model 3: Security Token/Equity Token
Here it becomes clear that there can sometimes be fluid transitions between different token variants. Security tokens are basically a possible variant of a digital security, which is why the name suffix “Security” for “security” has emerged on the market. Above all, but not only US authorities are currently dealing with the question of the correct classification of these tokens as securities of the digital world. Such tokens are increasingly emerging on the global crypto market. As I said, the offers in this segment sometimes show clear parallels to securities such as stocks or bonds. Similarities to equity are also recognizable in individual cases. In return for their investment, buyers and thus holders of such tokens receive an entitlement to certain services. Participation in profits after the successful ICO and market launch of the companies is one possibility.
A right to have a say in important decisions of the token-issuing companies is also conceivable, in principle, several forms of participation in equity tokens are possible. A kind of lending can also take place through the issuance of security tokens. Authorities now provide for high entry barriers for offers in this token class. In many countries, as with shares, the so-called “prospectus requirement” applies. Providers are forced to accurately present risks in particular. In many countries, identical legal requirements already apply in terms of investor protection as with conventional shares. The associated bureaucracy not only extends the phase from the first plan to market maturity, but also increases costs – for example, compared to utility tokens – usually significantly.
Worth knowing:
The US stock exchange supervisory authority bases its applications on the “Howey Test”. It is intended to help determine whether the publisher’s financial and work success has an impact on the investment value of the token. However, this practice is controversial.
Model 4: Utility Token
As the name suggests, this area is about a specific purpose or a special functionality. The English term “Utility” indicates this. To date, these tokens are particularly popular in the world of blockchain and are most frequently used. Providers are therefore specifically pursuing a plan and do not only have the issuance of a new digital currency in mind. Issuance within its own blockchain is just as conceivable as use on other types of virtual platforms. Online retailers and providers of products/services are a possible circle of providers. Holders of the utility tokens could then exchange the “coins” for designated services. For some time now, football clubs have also been an example, offering fans special offers through utility tokens, for example, or enabling them to participate in votes. There is therefore a clear incentive for the purchase decision.
Model 5: So-Called “Membership Token”
Access Token is another common name for this type. The club tokens mentioned above can be such a product depending on the exact technical orientation and opening for the target groups. It is about the fact that holders of the digital coins enjoy certain privileges. The token is only used when the associated preferential services are claimed. Clubs, fitness studios, companies and many other interested parties can use such tokens, for example, for closer customer loyalty. There are other variants in which publishers grant their investors special price conditions or pre-emptive rights for later transactions and investments.
Model 6: Offers in the “Asset-backed Token” Section
With these tokens, there is an explicit connection to a specific asset, i.e. an asset. This can be just as much an asset as another type of “investment”. The link with a legal claim to a certain amount of gold, real estate (-shares) or other raw materials is conceivable. Companies that build wind turbines or building cooperatives are two possible providers of such tokens. Here it can also be that token holders are rewarded on a small scale for their financial injection. Investors may secure a small share in a wind turbine or a newly built building complex.
Our Conclusion on the Different Types of Tokens
The previous explanations are the best proof that tokens can be a kind of “hybrid” depending on the definition. Often the individual point of view decides which category you would assign which offer to.
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