Crypto tokens, which are also called crypto assets, are special kinds of virtual currency tokens that reside on their own blockchains and represent an asset or utility. Most often, crypto tokens are used to fundraise for crowd sales. They operate on top of a blockchain for the creation and execution of decentralized apps and smart contracts and the tokens are used to facilitate the transactions.
Tokens of the particular Blockchain upon which the project is launched will usually have to be bought in order to be exchanged for ICO tokens, hence it is important for traders and investors to be aware of the schedule for upcoming ICOs.
ETH is usually the token used for exchange because the majority of ICOs launch on the Ethereum Blockchain.
Since the product or project is more often than not in its embryonic stage at the time of the ICO crowdfunding process, the ICO token’s true function and purpose is in most cases yet to be realized. At the ICO stage, the tokens can usually be grouped together into one of three categories: Security tokens, Equity tokens, and Utility tokens.
Knowing how to distinguish these categories involves determining the specific nature and function of the token around which the project is centered. The main and crucial distinction, is whether or not a token is a security, and therefore subject to securities registration requirements.
The broad and varying definition of the term “security” is a regulatory minefield. This has always been true for traditional financial products and now it is especially true for the cryptocurrency market. An arrangement is a security if it involves “an investment of money, and a common enterprise, with the expectation of profit, primarily from the efforts of others.”
Investors have the option of accessing a huge range of security tokens through ICOs. A security token is fundamentally different from the currently available ICO project tokens in that it provides legal and enforceable ownership of a company’s profits and voice in its governance much like common stock traded on any exchange.
This category of tokens represents assets such as participation in real physical undertakings, companies or earning streams or an entitlement to dividends or interest payments. In terms of their economic function, security tokens are synonymous with equities, bonds, or derivatives.
One exciting application of smart contracts on the Ethereum Network is the potential for startups to distribute equity tokens through initial coin offerings. That would reduce the hurdles that an average person has to face in order to take part in the early stages of a company’s development. And democratic governance of a project could be conducted in a transparent manner through voting on the Blockchain.
As of yet, few startups have attempted to conduct equity token sales for fear of falling afoul of the Securities and Exchange Commission (SEC). But many Venture Capital insiders are bullish on the prospect of equity tokens taking a central role in the crypto finance industry, when and as the legal issues are resolved.
This category provides access to the goods and services that the project will launch in the future. Also, they can be used as a type of discount or premium access to the goods and services of the project.
However, given that this area is still a regulatory nightmare for people planning to issue security and equity tokens, many projects attempt to ensure that the tokens within their specific model fall under the definition of Utility Tokens rather than securities, so as to avoid the SEC regulations altogether. If a token is imbued with a certain functionality and use within the Blockchain infrastructure of that particular project, the token can avoid being labelled as a security, and thus render SEC regulations inapplicable.
If utility token does not add value to the functioning of the product and is only important for investment purposes, then it can be considered as a security token. Utility tokens are used in more than 95% of all the projects and sometimes they are given completely absurd functions. This is an implication of the legal restrictions.
It is worth noticing that the safest type of token for investors is security token. However, this type of token makes ICO more complicated and requires KYC/AML procedures.
It is necessary to analyze the type of token and the economy behind it when making investment decisions. It is a must to always remember that the price of token is based on the basic principles of economics, such as law of demand and fair value. It is always advisable to understand the base value of token and its current and potential price in case all the targets are reached.