Cryptocurrencies, Tokens and Securities; What’s the Difference?
Unless you’re new to the industry, you already know that there are well over 1,500 “cryptocurrencies”. However, it’s important to know that not all cryptos were created equally.
These are further described as either coins or tokens. Knowing the difference will dramatically improve your understanding of the cryptosphere.
And you’ve probably heard of some coins being referred to as altcoins (any non-Bitcoin coin or token). As if that’s not enough, there are different types of tokens, some falling under the category of securities.
With the recent statements about Ethereum not being a security, it’s only good if we once more try to give the differences between these categories.
What is a cryptocurrency?
A coin or simply a cryptocurrency is essentially a financial asset which can be used as a currency, a medium of exchange, or a store of value.
Coins have their own unique blockchain and operate independently of each other. For instance, Bitcoin is uniquely different from every other coin.
Cryptocurrencies are digital or virtual currencies that use cryptography to secure transactions. Bitcoin is taken as the main coin, while the rest form what is called altcoins.
Some of the top altcoins include Ethereum, Litecoin, Ripple, and Iota
What is a token?
A token is simply an asset issued on top of a blockchain. It usually doesn’t have any inherent value and can’t be used as a currency or medium of exchange like a coin.
Tokens can be traded but will not be taken as currencies in the same sense as Bitcoin and Litecoin.
For example, if you consider Golem (GNT), its tokens were issued on the Ethereum blockchain. As such, GNT isn’t used as a currency on the network, (that’s the use of ether).
Perhaps the simplest explanation is that tokens can’t exist without the blockchain infrastructure of the main coin like Ethereum.
Tokens are designed to help users access and use decentralized applications (dApps). Most of the dApps users will have access to a platform like Ethereum, Lisk, Qtum, or EOS.
Tokens represent any form of asset that is fungible and tradable. Many eventually take on the form of crypto coins when they migrate to their own blockchain, e.g. TRON (TRX).
There are several different types of tokens, but the most common ones are utility tokens and security tokens.
Utility tokens are basically those issued to allow users to be able to transact on a blockchain, exchange tokens, or access products and services.
They aren’t considered investments, and thus aren’t exposed to regulatory scrutiny
What are securities?
Tokens were made popular with the ICO boom of 2017 and debate has raged concerning regulatory measures against them. The US Securities and Exchanges Commission has previously said that all tokens are securities. So, what’s a security?
Security tokens are basically tokens that represent a kind of value ownership like equity in a company, real-estate, and so on.
One way to look at it is that a “security token” will usually be expected to give holders profits, dividends, or interest. In some cases, they can represent a share or some form of partnership in a company
Companies usually offer securities to investors in return for ownership and investors expect to earn a return on their investment.
Therefore, securities fall under the regulatory framework of the SEC. perhaps, that’s why we have platforms like Polymath that aim to make it clear which tokens are securities and which are not.
When a security is issued, the issuer should inform the authorities and register. According to SEC, “virtual coins or tokens may be securities and subject to the federal securities laws.
The federal securities laws provide disclosure requirements and other important protections of which investors should be aware”. As such, if a token qualifies as a security, it is subject to regulation and that could hurt some coins if they were to be declared securities.
The Howey test is usually conducted in cases where the SEC needs to ascertain whether a token falls under the category of securities.
In short, security tokens usually allow the holder to have ownership rights in a company. On the other hand, utility tokens possess a certain value and can have several use cases on a given platform.
The basic difference between cryptocurrencies (altcoins) and tokens is that coins do have an independent blockchain and function as currencies. Tokens, on the other hand, operate on a blockchain.