Rebooting Crypto: Deciphering the World of Tokenization

In the ever expanding cryptocurrency ecosystem, our own jargon appears to be our worst enemy. While many have pointed out that the terminology itself may be the issue, I believe there is a fusion of blanket descriptors along with a lack of clear delineations that have blurred crypto definitions.

To most people all cryptos or tokens are the same, but this is not the case. Personally it would have been much better for the ecosystem to adopt language suitable to the underlying use cases connected to cryptos and tokens. In a sense what we are dealing with are units of digitalized value. This has been broadly described as tokenization.

So let’s first understand tokenization.

Tokens are our way to digitalize value. They are not those round items you get in an arcade, but rather a digital wrapping of a particular type of value or like I said above a digitalized unit of value. That being said, for certain types of tokens, arcade tokens are an excellent analogy. I will explain this later.

So what types of digital tokens are there? Essentially, the key component of specific categories of tokens are connected to the nature of the value placed on them. In other words, depending on the use case involved, tokens will derive their particular definition which will often times have legal and regulatory consequences.

The world of digital assets or tokens are often broken down into two main categories: Utility Tokens and Security Tokens. While this is often times true, a more correct categorization is Utility, Commodity, and Security Tokens. Commodity Tokens are in many ways a subclass of Utility Tokens, but as we can soon see by definitions and the changing world of crypto currencies, commodity tokens are now their own class.

Utility Tokens

Utility Tokens are units of digitalized value connected to a service which is ultimately offered by the issuer. Some services can be actual products, but more often than not the token just gives the investor the ability to purchase some sort of service or additional access on the issuers platform. Examples of Utility Tokens can be anywhere from tokens associated with cryptocurrency exchanges like Binance or Ternion to tokens like Snov or DAV that have convertible value connected to on platform activities. Remember my analogy above of arcade tokens? That’s right, many Utility Tokens act in a similar way. Arcade tokens only have value in the closed circuit of the arcade. Make no mistake, this is still value and depending on the game played, a token’s value will increase or decrease, but in all cases the tokens exist and have value in order to be utilized only inside the arcade. In an arcade I have to exchange the tokens to get “outside arcade” usability. Utility Tokens are valuable, but in order to be spent they must be transferred on an exchange into another type of token like a Commodity Token.

Commodity Tokens

Commodity Tokens act as virtual currencies. These have similar characteristics as fiat currencies or even a real commodity (like gold) that can be traded with profit-making intentions. While there are often over laps between Utility and Commodity Tokens, the currency or commodity like aspect of the latter is increasingly setting it apart.

Essentially, Commodity Tokens act as a sort of crypto or alternative currency. These are the famous ones like Bitcoin, Ethereum, Litecoin, EOS, and so on.

According to a Memorandum & Order for a court case that the CFTC had brought against cryptocurrency business operator Patrick Kerry McDonnell, Judge Jack Weinstein from a district court in New York ruled that “virtual currencies can be regulated by CFTC as a commodity.”

The Judge ruled the following: “Virtual currencies are ‘goods’ exchanged in a market for a uniform quality and value. … They fall well within the common definition of ‘commodity’.”

Given the fact that currencies are a type of commodity, this ruling essentially means that cryptocurrencies or those currencies that are pure currency instruments are in fact actual currencies or commodities.

In my mind the only time we should be using cryptocurrency as a descriptor is in relation to those Commodity Tokens that derive their value in the same way that currencies do.

Security Tokens

A Security Token are a unit of digital value that represents a share in a company. These are digitalized securities that include asset tokens or those physical assets like real estate that have had their value transferred to tokens. These digitalized securities or assets are far different than their counterparts above and are the only type of token regulated by US securities law.

So how does the above categories help us cryptocurrency enthusiasts? In order to attract a wider audience to cryptos or let’s use digital tokens we must be clear on the wide differences between them. All of these are units of digital value, but each category is very different than the other. In many ways we could rename the list as follows: Digital Tokens, Crypto or Digital Currencies, and Digital Securities or Assets. By being clear with our definitions we will attract more users and help grow the value of the industry as a whole.