Welcome to Hard Fork Basics, a collection of tips, tricks, guides, and advice to keep you up to date in the cryptocurrency and blockchain world.
Considering there are well over 2,000 cryptocurrencies on today’s market, the average blockchain investor faces being veritably overwhelmed by choice.
That certainly sounds like a lot, but pretty much all cryptocurrency falls into one of three token categories: currency, utility, or investment.
Each group requires different rules and regulations to ensure their issuance and exchange is above board with government regulators.
Depending on the country, cryptocurrency startups may have to register with regulators, and rules for investors may vary with each type of token.
So, let’s take a look at what each classification means, quickly.
This is the original (and most straight-forward) form a blockchain-derived token can take.
Tokens can be classified as currencies if (and only if) they were created entirely as a means of payment for goods and services external to the platform running the token.
For example, Bitcoin is seen as a currency as it was created with the intention of replacing fiat money. As such, Bitcoin holders are able to use their Bitcoin to purchase goods and services from shops, online retailers, and other merchants.
It’s worth noting that the SEC has deemed both Bitcoin and Ethereum to be currencies, after both were found to be too decentralized to be anything but.
These digital assets are built to provide investors with something other than a means of payment.
This typically comes in the form of access to a particular product or platform. For example, many cryptocurrency exchanges have issued their own native cryptocurrencies for customers to use to reduce trading fees.
The primary difference between a currency and a utility lies in the fact that holding a utility token gives access to a function provided directly by the businesses who issued it.
In our cryptocurrency exchange example, the holder is only granted access to reduced trading fees through the use of that token.
Most tokens created on blockchains (like EOS and Ethereum) are essentially utility tokens, as each one is intended to be used natively on a single platform, such as a decentralized app (dApp).
Investment tokens are perhaps the most complicated to classify. Inevitably, most become securities in the eyes of financial regulators like the SEC and FINMA.
Tokens found in in this group are the assets that promise a positive return on their investment (besides profits generated from rising market prices).
Such returns are usually distributed by the platform itself or the company that created it.
The most famous example is the The DAO – an autonomous, smart-contract powered blockchain organization that reinvested profits from its ICO to generate more profit for holders.
This was deemed to be the critical factor that allowed the SEC to retroactively classify the digital assets issued by The DAO as investment tokens (and by extension, securities).
Well, there you have it! The three major types of cryptocurrency assets. It’s worth mentioning that they can also come in hybrid forms, such as utility/investment tokens, but that’s for another day.