The term "token" has many meanings, from a plastic coin in a casino to a physical device for computer authentication. In a blockchain, a token is often confused with cryptocurrency. Though a token is related to cryptocurrency, it has a different meaning.
What Is a Token?
It is a digital asset that an investor receives from a company in exchange for money. Technically, tokens are registry entries distributed in a blockchain. They are managed by using smart contracts, in which the balances in the token holder accounts are recorded, and which allow the transfer of digital assets from one account to another. It is possible to access tokens through special apps that use electronic signatures. The main part of the existing assets is formed on Ethereum's Blockchain protocol under the ERC-20 standard.
When a company decides to attract investments, it releases tokens - this process is called ICO (initial coin offering). Issued assets can have different functions. For example, in the case of an ICO cryptocurrency, investors buy tokens that may increase in price in the future. ICO tokens represent a kind of obligation to the owner to provide them with something in return for fiat money invested or cryptocurrency.
Types of Tokens
The most common types of digital assets are:
This type allows you to use the services and products of a particular service or platform. Such coins are often called app coins and can be compared with plastic coins that are used in amusement parks. The most common example of such coins is Bitcoin and Ethereum. It is possible to freely buy or sell user tokens on exchanges for other coins or fiat currency. Part of these digital assets can be obtained by mining.
Stock Tokens or Digital Shares
ICO is often compared with IPO. In some cases, such a comparison turns out to be quite fair. Tokens are required to fund new startups and further build a network. They do not provide access to services but offer to take part in the development of the platform.
A stock token (digital share) can be compared with a regular stock. Its owner can receive dividends - interest in the company's net profit. In addition, if the investor has enough securities, they have a right to vote. Of course, the one who collected more shares during the ICO or bought them on the exchange has more influence on the further development of the company.
There are companies that combine several types of tokens, such as Sia. Its user token is Siacoin (SC), and the digital share is Siafund. These shares are issued only during the ICO and, after collecting funds, they can only be purchased on the stock exchange.
Another example is the Digix. Holders of this platform's digital shares can receive remuneration. Dividends are formed due to the commission from transactions within the Digix Network Gold. Digital shareholders can put forward their proposals for the development of the network or vote on existing ones.
At first glance, credit tokens look like stock tokens. The company issues a certain amount of cryptocurrency during the ICO. Investors who acquire such digital assets receive interest for a certain period, depending on the amount spent. This type of digital asset gives the investor the right to be reimbursed in the future.
A similar system has been successfully implemented by the Steemit platform. It uses credit tokens called Steem Dollar (SD), but the platform's main cryptocurrency is Steem.
How to Buy and Sell ICO Tokens
You can buy digital assets through exchanges, from other holders, or during the ICO. Learn about upcoming or active ICOs here and here. After the ICO, tokens are traded on exchanges, where they change in price, and the price increase is not guaranteed. Investors can introduce their tokens to the stock exchange and exchange them for other digital assets or fiat currencies, receiving a profit if the asset value grows.
When buying tokens, investors want to benefit from further sale or use them directly by receiving services for which they purchased digital shares. You can sell your tokens in the same place where you buy them.
Regulation of Tokens
It is worth mentioning that tokens as securities fall under the SEC regulations, which states that any asset that has successfully passed the Howey test should be considered a security.
Specifically, the following conditions must be met:
There are investments in the form of cash or other assets.
Investment funds are directed to a common enterprise.
Investments are expected to make a profit.
Profit is the result of actions by a third party.
Another assessment criterion, which is included in the Howey test, is the degree of control and regulation of profits by investors. If this criterion is minimized, then the investments can be considered securities. Accordingly, all digital assets can be considered securities to some extent. But coins that are issued during an ICO and are aimed at internal circulation within the project itself and its services, should not be included in this category.