Types of Tokens
Utility Tokens
Utility tokens grant holders access to a product or service within a blockchain ecosystem. They are designed not as investments but as tools to utilise the network’s features. For example, these tokens may be used to pay transaction fees or access premium functionalities of a platform.
Governance tokens, a prominent type of utility token, enable holders to participate in the decision-making processes of a blockchain project. This includes voting on protocol upgrades or governance changes, as commonly observed in decentralised autonomous organisations (DAOs).
Security Tokens
Security tokens represent ownership or a stake in an asset, such as company shares. Considered investment contracts, they are regulated under securities laws. Security tokens often offer benefits such as dividends, revenue shares, or voting rights.
Payment Tokens
Payment tokens are designed for use as a means of payment or value exchange. They can be classified into two main types:
- Cryptocurrencies: Digital or virtual currencies secured by cryptography that operate without reliance on a central authority. Notable examples include Bitcoin and Ether. Cryptocurrencies are known for their price volatility and are used for diverse transactions.
- Stablecoins: A subset of payment tokens designed to retain a stable value by being pegged to a fiat currency, a collection of assets, or other cryptocurrencies. Examples such as Tether (USDT) and USD Coin (USDC) aim to offer the advantages of cryptocurrencies—such as quick transactions and minimal fees—while maintaining the stability of traditional currencies.
Process of Token Issuance
The methods for issuing tokens differ based on the type of token, regulatory requirements, and the objectives of the issuing entity. Here are the most common approaches:
Initial Coin Offering (ICO)
A widely used fundraising approach where projects raise capital by selling tokens to early investors. ICOs are mainly employed for utility tokens that grant access to products or services within a blockchain ecosystem. The process begins with the creation of a white paper that details the project, its tokenomics, and the terms of the ICO.
Security Token Offering (STO)
STOs must adhere to securities regulations, including registration with appropriate regulatory authorities, comprehensive disclosures, and compliance with investor protection laws. This highly regulated process ensures transparency, safeguards investors, and ensures legal adherence.
Simple Agreement for Future Tokens (SAFT)
SAFT is an investment contract used in the blockchain space for fundraising. It allows investors to buy rights to future tokens, which will be delivered once the project's platform or network is launched. This method aims to comply with securities regulations and provides legal clarity to both projects and investors.
Initial Exchange Offering (IEO)
This method is similar to an ICO but is executed through cryptocurrency exchanges. IEOs offer a more secure and reputable platform for token sales by leveraging the exchange’s credibility and user base. The exchange conducts due diligence on the project, manages the token sale, and lists the token for trading post-IEO. Exchanges facilitating IEOs may also need to comply with securities regulations, depending on the jurisdiction and token type.
Initial DEX Offering (IDO)
In an IDO, tokens are offered directly on a Decentralised Exchange (DEX), allowing users to purchase them during the token generation event. Liquidity pools are essential in IDOs, as they provide post-sale liquidity, stabilise the token’s price, and enable trading. Unlike ICOs or IEOs, IDOs are managed through smart contracts on the blockchain, providing a more open and accessible platform but with fewer regulatory safeguards. Investors participate by using their digital wallets to commit funds, and the DEX manages the distribution and trading of the tokens.
Token Generating Event (TGE)
TGEs encompass any event where a blockchain project generates and distributes tokens. Although often used interchangeably with ICOs, TGEs cover various token issuance methods and involve the technical creation and distribution of tokens via smart contracts.
Airdrops
The free distribution of tokens to a wide audience, typically to promote a new project or reward existing users. Airdrops are a marketing tool for increasing awareness and distributing tokens widely. They are usually given to holders of a specific cryptocurrency or users meeting certain criteria. While generally less regulated, airdrops may still be subject to AML and KYC regulations in some jurisdictions.
Regulatory Considerations
- Payment Tokens: While most countries do not specify detailed regulations for issuing payment tokens, regulatory scrutiny can vary.
- Security Tokens: Must comply with securities regulations globally. For example, in the US, they must adhere to the Securities Act of 1933, while in the EU, they fall under MiFID II.
- Utility Tokens: Regulatory scrutiny can vary, with some countries requiring detailed disclosures about the project’s purpose and use cases.
- Stablecoins: Many countries, including the UK, are actively regulating stablecoins to ensure their stability and reliability. The crucial requirement is having sufficient asset reserves to back their value, as exemplified by the EU’s MiCA.
Types of Tokens
Utility Tokens
Utility tokens grant holders access to a product or service within a blockchain ecosystem. They are designed not as investments but as tools to utilise the network’s features. For example, these tokens may be used to pay transaction fees or access premium functionalities of a platform.
Governance tokens, a prominent type of utility token, enable holders to participate in the decision-making processes of a blockchain project. This includes voting on protocol upgrades or governance changes, as commonly observed in decentralised autonomous organisations (DAOs).
Security Tokens
Security tokens represent ownership or a stake in an asset, such as company shares. Considered investment contracts, they are regulated under securities laws. Security tokens often offer benefits such as dividends, revenue shares, or voting rights.
Payment Tokens
Payment tokens are designed for use as a means of payment or value exchange. They can be classified into two main types:
- Cryptocurrencies: Digital or virtual currencies secured by cryptography that operate without reliance on a central authority. Notable examples include Bitcoin and Ether. Cryptocurrencies are known for their price volatility and are used for diverse transactions.
- Stablecoins: A subset of payment tokens designed to retain a stable value by being pegged to a fiat currency, a collection of assets, or other cryptocurrencies. Examples such as Tether (USDT) and USD Coin (USDC) aim to offer the advantages of cryptocurrencies—such as quick transactions and minimal fees—while maintaining the stability of traditional currencies.
Process of Token Issuance
The methods for issuing tokens differ based on the type of token, regulatory requirements, and the objectives of the issuing entity. Here are the most common approaches:
Initial Coin Offering (ICO)
A widely used fundraising approach where projects raise capital by selling tokens to early investors. ICOs are mainly employed for utility tokens that grant access to products or services within a blockchain ecosystem. The process begins with the creation of a white paper that details the project, its tokenomics, and the terms of the ICO.
Security Token Offering (STO)
STOs must adhere to securities regulations, including registration with appropriate regulatory authorities, comprehensive disclosures, and compliance with investor protection laws. This highly regulated process ensures transparency, safeguards investors, and ensures legal adherence.
Simple Agreement for Future Tokens (SAFT)
SAFT is an investment contract used in the blockchain space for fundraising. It allows investors to buy rights to future tokens, which will be delivered once the project's platform or network is launched. This method aims to comply with securities regulations and provides legal clarity to both projects and investors.
Initial Exchange Offering (IEO)
This method is similar to an ICO but is executed through cryptocurrency exchanges. IEOs offer a more secure and reputable platform for token sales by leveraging the exchange’s credibility and user base. The exchange conducts due diligence on the project, manages the token sale, and lists the token for trading post-IEO. Exchanges facilitating IEOs may also need to comply with securities regulations, depending on the jurisdiction and token type.
Initial DEX Offering (IDO)
In an IDO, tokens are offered directly on a Decentralised Exchange (DEX), allowing users to purchase them during the token generation event. Liquidity pools are essential in IDOs, as they provide post-sale liquidity, stabilise the token’s price, and enable trading. Unlike ICOs or IEOs, IDOs are managed through smart contracts on the blockchain, providing a more open and accessible platform but with fewer regulatory safeguards. Investors participate by using their digital wallets to commit funds, and the DEX manages the distribution and trading of the tokens.
Token Generating Event (TGE)
TGEs encompass any event where a blockchain project generates and distributes tokens. Although often used interchangeably with ICOs, TGEs cover various token issuance methods and involve the technical creation and distribution of tokens via smart contracts.
Airdrops
The free distribution of tokens to a wide audience, typically to promote a new project or reward existing users. Airdrops are a marketing tool for increasing awareness and distributing tokens widely. They are usually given to holders of a specific cryptocurrency or users meeting certain criteria. While generally less regulated, airdrops may still be subject to AML and KYC regulations in some jurisdictions.
Regulatory Considerations
- Payment Tokens: While most countries do not specify detailed regulations for issuing payment tokens, regulatory scrutiny can vary.
- Security Tokens: Must comply with securities regulations globally. For example, in the US, they must adhere to the Securities Act of 1933, while in the EU, they fall under MiFID II.
- Utility Tokens: Regulatory scrutiny can vary, with some countries requiring detailed disclosures about the project’s purpose and use cases.
- Stablecoins: Many countries, including the UK, are actively regulating stablecoins to ensure their stability and reliability. The crucial requirement is having sufficient asset reserves to back their value, as exemplified by the EU’s MiCA.