I’ve already written on Tokenomics and related token classifications in this June 2017 article that quickly became a reference point throughout the industry, Tokenomics – A Business Guide to Token Usage, Utility and Value.
In light of the evolution of the blockchain market, I hope we can re-classify tokens in a way that is simpler, and takes into account the recent developments in what has been commonly labelled as “security tokens”.
For background, let’s define a cryptographically-enabled token as a cryptocurrency with a purpose. No matter what its purpose is, the token has the same properties as cryptocurrency. It can be exchanged and its ownership can be transferred on a blockchain, from one peer to another, without the involvement of a central party. The token holder or owner can be a person, an organization, or an autonomous computer program, also referred to as a smart contract.
I’m a big fan of simplicity. With that mind, I think we should settle on the following simple classification for tokens.
They include all types of work-related tokens (passive or active; by computers or humans), i.e. ones where there is an earning and spending equivalent to some valuable activity. It also includes the payment function in cases where that’s all what the token does. My previous article on Tokenomics provides a good depth of coverage on the utilitarian aspect of tokens, except for the “earnings” role which could be interpreted as an asset token that yields a dividend.
This is where the commonly named “security tokens” fall. I’m not a big fan of the term “security tokens” because it is a legal classification, and doesn’t say much about the inherent functionality that is represented by such tokens. Plus, for some tokens, it has been an escape route from the SEC’s grips for seeing everything as a security token. In the asset token case, the owner of the token is certainly a human or organization, and the token represents an ownership of sorts in something that is valuable at the time of the transaction. In most cases, the token represents something that already exists in the real world, eg. a physical property, or a share in a company. What the blockchain adds is a new form of liquidity and ownership exchange, mostly centered on efficiency of transfer.
CryptoKitties are the best example of this new class of digital property that is non-fungible, unlike the previous two above which are fungible. You don’t need a particular token to represent this new form of asset, but you might need one if the creator decides to associate one with it. For example, a given crypto property might be worth 2 ETH or 1 NEWTOKEN if NEWTOKEN is the currency of choice for this specific asset. This NEWTOKEN is different from an Asset Token because it represents an asset that is stored on a blockchain the minute it is born or created. A crypto property has no physical or digital equivalent without a blockchain. It is not something you can take out of a drawer or pull out of your pocket. It is new and therefore native to blockchains.
This isn’t a regulatory framework, nor was I discussing the legal implications for complying with the issuance and operations of these types of tokens. That is beyond the scope of this post.
However, I’d like to emphasize that the Utility Token and Crypto Property aspects are the most innovative concepts that are newest to us. Therefore, we should continue to question whether existing security laws should be squarely applied to them without an updating of sorts.
When technology and markets evolve, regulators need to figure out when to rigidly enforce adoption of old rules, and when to evolve themselves, especially if existing regulation hasn’t been updated for decades. Otherwise, regulation could stand in the way of continued innovation, wealth creation, talent development, and industry growth.