Types of crypto-assets and how securities tokens are qualified
It is generally agreed that “cryptocurrency” is the current buzzword in many media outlets today. So, it makes sense that we should be familiar with the terminology on cryptos, especially those on crypto-assets. A crypto-asset is a type of private asset whose perceived or inherent value is at least partially derived from its use of cryptography and distributed ledger or similar technology. Similarly, a token is an object that represents something else, such as a physical or virtual object. We will discuss the different types of crypto-assets/tokens and what are the criteria by which tokens can be considered as securities.
Payment/exchange tokens
Initial Coin Offerings (ICO, also called “token sales”) are launched to create a crypto-payment instrument. Issued tokens are meant to function as a means of exchange, a unit of account or a store of value. The aim is to ensure that it is possible to pay for goods or services via a DLT platform. However, most regulators have stated that payment tokens cannot be assimilated with a fiat currency as they are not issued or backed by a central bank. This assimilation is more applicable for investment or utility tokens.
Utility tokens
ICOs can be used to sell tokens that provide investors with a functional advantage other than the ability to pay for external goods or services. These are called utility tokens and some of them can be redeemed in exchange for access to a specific product/function provided by the token issuer directly. They can also be used to entitle the owner to access, use or participate in an event, service or product. It is required to ensure safe crypto storage for utility tokens.
Securities tokens
Tokens issued via an ICO may have an investment dimension; these tokens are more similar to financial instruments than they are to cash. Investment tokens should be considered as assets providing rights such as ownership, payment of dividend or entitlement to a share in future profits or cash flows. Securities tokens may qualify as transferable securities or financial instruments under the MiFID II directive. Securities tokens are the digital representations of existing securities such as equities, debt, funds etc.
Securities tokens and qualification criteria
In some instances, regulators have opted to treat security tokens as securities. The view in these cases is that these tokens are intended to represent a promise with regard to future cash flows or a claim to partial ownership of a company. Issuers can design tokens in a manner that ensures they qualify as securities by meeting three main criteria under European law as follows: –
- Transferability – It means that units can be assigned to any other person, irrespective of whether certificates exist that record or document the existence of token units.
- Negotiability – Securities are classified as negotiable if they can be traded on a regulated market, multilateral trading facility or organized trading facility.
- Standardization – MiFID defines transferable securities as “classes of securities” that share certain common characteristics so that it is sufficient to refer to the type and number of units during trading.
Final comments
As can be observed, crypto-asset tokens are of different types and have different characteristics which play a role in transforming the digital finance market. With increasing legislation, tokens are also being streamlined to perform specific functions and the rapid development of the cryptocurrency world will only aid this going forward. So, it’s time to add the various crypto-assets definitions to your lexicon as you will be needing this knowledge very soon!