Difference between token and coin

Difference between token and coin

The term crypto-currency is more common in media than the underlying technology of the block chain, whereby these two are inevitably connected. Contrary to the widespread opinion, crypto currencies are not always simply a digital currency or payment method.

This misconception is certainly based on the familiarity of the largest block chain Bitcoin and its crypto currency of the same name, since the primary goal is to create a digital, decentralized and cryptographically encrypted P2P currency. Crypto currencies can have different meanings and functions. First of all one differentiates with crypto currencies between so-called Coins and Tokens.

Difference between Coins and Tokens

Coins use their own block chain, such as Bitcoin (Bitcoin), Ethereum (Ether) or NEO (Neo). They usually act as digital P2P currency. Tokens, on the other hand, do not have their own block chain, but use existing block chain networks and enable the creation of decentralized applications. For example, the crypto currency Golem runs as a so-called ERC20 token on the Ethereum block chain.

Regardless of whether a crypto currency is a coin or token, most of them can be traded on so-called crypto exchanges. These are barter exchanges, which behave similar to a stock market according to supply and demand. However, they are hardly regulated by the authorities and therefore more susceptible to manipulation and are considered highly speculative. The lack of regulation is also accompanied by the fact that only unregulated tokens can be traded on these exchanges – more on this in a moment.

In addition to trading existing crypto-currencies, there is the possibility to participate in early financing rounds for various block chain projects by participating in a so-called Initial Coin Offering (ICO) or Token Generation Event (TGE). Block chain companies distribute tokens to interested parties and receive their financing in return, for example in the form of ether coins.

Token types

Between the different tokens, which are distributed and traded, there are again several distinctions, which define goal, purpose and benefit of these. Since crypto-currencies have basically created new territory, the current legal situation for this is still very fuzzy in large parts.

In the future, many developments and regulations can be expected from international governments and authorities. In the following, we would like to shed some light on the subject and focus on three current token categories – the utility token, the security token and the equity token.

Utility Token

Most crypto currencies today are utility tokens. These are crypto-currencies which represent a certain utility or value within their block chain system. They are also described as the fuel of the system, as they ensure that the system and the functioning of the block chain is kept alive without central control. They can be used to pay transaction fees or provide access to certain services of the block chain, thereby acting as a kind of digital voucher. Since many projects are still in development, the associated tokens of these block chain projects cannot yet be used, but can already be traded.

Utility tokens are therefore not really intended as an investment, but many people speculate that the associated block chain and its services will be successful in the future and that the value of the corresponding token will increase. However, the purchase of a Utility Token does not entitle the holder to any shares in the company itself, dividends or voting rights.

Security Token

A token, which is regarded as security, behaves in contrast to the utility token more like a security and has no “operative” function for the block chain. Thus a crypto currency counts as security if it represents an investment with the main goal of realizing investment gains. Whether a crypto currency is officially classified as a security token is determined by the so-called howey test. This test, established by the US Supreme Court, checks four central characteristics in a simplified way: Is it a financial investment? Is there a profit expectation from the investment? Was the investment of money in a joint venture successful? Is the profit generated by the performance of a promoter or a third party? If all of the above are true, an investment counts as a security, or in terms of crypto-currencies as a security token.

Since the definition as a security token involves several financial market obligations and regulations, many cryptocurrencies try to avoid this status, so that it is easier to raise money to finance the project through ICO or TGE. Likewise, security tokens cannot be traded on private crypto exchanges such as Binance or Kraken, but theoretically on public and regulated securities exchanges. Security tokens are still extremely rare due to regulatory restrictions.

Equity Token

The equity token is a subtype of the security token and an important part of future crypto economies. To a certain extent, it combines classic, financial market-regulated values such as company or share shares with the technological implementation of block chain and token. This means that with the acquisition of an equity token, one receives, for example, shares in the company, shares in assets (e.g. real estate), voting rights or the right to a dividend. The Equity Token enables such shares to be represented in the form of digital tokens. This is accompanied by all the advantages and disadvantages of regulated financial supervisory authorities. Because of this, the Equity Token is not yet widely used as a security and is aimed at financial markets and professional rather than private investors. However, there are increasing considerations towards the equity token, as it is expected that future regulations will favour security rather than utility tokens.