Educational Byte: The Difference Between Cryptocurrencies, Tokens, and Securities

In 2008, a mysterious character or group known as Satoshi Nakamoto introduced the world to a new form of money: Bitcoin (BTC). This innovative cryptocurrency concept forever changed how we think about money and technology. Since then, crypto has evolved to create different kinds of tokens with surprising uses and utilities.

Let’s discuss here some common concepts and their differences: tokens, currencies, and crypto securities. Terms like coins, tokens, and cryptocurrencies could be used freely to name the same type of digital assets. It’ll depend entirely on the context, but this guide could help you to identify the most common ways to differentiate crypto assets. 

Note however that the distinctions between the terms described below are not universally accepted, although this way of differentiating between them seems to be quite common.

Cryptocurrencies vs. Crypto Tokens

Let's start with the basics. A cryptocurrency is a digital value unit generally built on its own independent distributed ledger. They have their own network and a protocol to validate and record transactions. 

For example, Bitcoin (BTC) has its own ledger with the same name, and ether (ETH) has its Ethereum blockchain. Meanwhile, GBYTE runs on the Obyte Directed Acyclic Graph (DAG), another type of distributed ledger. 

Now, beyond the crypto “currencies”, there are other types of digital assets, such as crypto tokens. They’re crypto coins too, but, unlike BTC, ETH or GBYTE, they don’t have their own ledger. Instead, they may be a representation of value inside a Dapp, and work on a ledger that already has a native cryptocurrency.

Therefore, tokens use the network and protocol of another cryptocurrency to create their units of value. For example, ERC-20 assets like USD Coin (USDC) or Curve DAO (CRV) are tokens that run on the Ethereum blockchain. Obyte has that function too, and anyone can easily issue new tokens inside the DAG, to represent whatever they want to. You don’t even need code knowledge to do it. The Obyte Asset Registry provides a user-friendly and intuitive interface. 

Token Use Cases

Tokens can have different functions and use cases, depending on the project or individual or AA (or smart contract, in case of Ethereum) that issues them. Thus, we have utility tokens, which give access to different features or services on a specific ledger or app. We can say that new assets created for Initial Coin Offerings (ICOs) could be utility tokens.

On the other hand, community and governance tokens are centered on the idea of collaboration and generally provide certain benefits to their holders. The OSWAP Governance Token could fall into this category. All the OSWAP holders can vote on the parameters of this DeFi platform by locking their tokens for some time. In exchange for this participation, they can receive a share of emissions of the same token. 

Tokens can also represent real-world objects and facilitate their trading without transporting them. It’s more and more common, for example, to “divide” a real estate property into a stash of crypto tokens to facilitate investments. We have Non-Fungible Tokens (NFTs) as well, some of them are created as pieces of art rather than as actual coins.

Finally, tokens could be considered securities and be regulated as such. That means they could be seen as financial assets like stocks, bonds, derivatives, etc., —if they have the same features or goals. They may work as an investment contract, and those buying them could expect a future profit. 

Therefore, depending on the country and the asset, authorities may expect strict compliance with the related laws by issuers. Security tokens are subject to stricter regulations than other crypto coins. The United States, for example, is very inflexible with it. This kind of token must be issued and traded under specific rules and legal requirements to protect investors and prevent fraud.

The Howey Test

To recognize if a token is a security or not, one needs to apply the Howey Test. According to FindLaw, a transaction (or token) is an investment contract (security) if it meets certain features:

“- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party.”

Initial Coin Offerings (ICOs), a popular way to raise funds for new crypto projects, sometimes offer tokens that authorities consider securities. Especially US authorities, like the Securities and Exchange Commission (SEC).

That’s why Obyte offers ID attestations to accredit yourself as an authorized US investor or as a non-US investor, directly available as a wallet chatbot. This way, you could participate in more investment opportunities.

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The lead image for this article was generated by HackerNoon's AI Image Generator via the prompt "A man with a thought bubble thinking about crypto coins".