Blockchain Semantics Insights
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Different types of CryptocurrenciesBy Amit Dudani | April 9, 2018, 2:28 p.m. GMT
Start-ups need investments and typically, they have always had to go through various rounds of obtaining the financing, starting with the early seed investments. The Initial Coin Offering (ICO) is fast beating these orthodox processes and we can now broadly categorize this into three types of tokens that are issued through these crowd offerings/sales. It may be challenging for an investor to isolate the exact category of an ICO token, due to the lack of technical knowledge and maybe even more challenging to answer questions raised by enthusiasts. For example, ‘What are the different types of tokens and what is the difference between the various categories?’
This categorization is a great start to answering these and many more questions.
The potential to issue stock or equity tokens through initial coin offerings is one of the most promising applications of the Ethereum-based smart contracts for start-ups. It provides investors with a more active role in corporate governance. The investors can now undergo a simple voting process that is conducted transparently through the Blockchain and also benefits the start-ups by decreasing the number of middlemen required in their entry into the financial market. This process goes a long way in making stock trading more accessible to everyone who may be interested in participating.
Because the technology still so new and there is no regulatory framework or guidance in place, only a few start-ups have attempted equity token sales. However, the Delaware General Assembly recently passed a bill that will enable blockchain-based stock trading, making a clear entry for equity tokens as the main role in the crypto finance industry.
Here, the true meaning of ‘Security’ can be easily conveyed as any kind of tradable assets. Using ICO, investors can access multiple security tokens from tokens backed by real estate to precious metals, that can be redeemed from coins.Subject to SEC securities and regulations in The United States, guidelines have now been established for whether the arrangement was an investment contract and subject to security regulations in SEC v/s Howey.
It is important to note here that utility tokens are not designed as investments and if they are carefully structured, the tokens would be exempt from federal laws of governing securities as they represent the future access to a company’s product or service.
Thus, most tokens are presumably securities, as the most ICO participants take this as an investment opportunity. However, if a token does not comply with the three requirements of the Howey test, it may be considered as a ‘utility token’ only. If these tokens provide access to users for products or services, they may be labeled ‘App coins’ or ‘App tokens’ as well. Also, having a fixed supply of tokens would imply that the value of these tokens will increase with the increase in demand for the associated product and service.Also, the utility tokens are not a legal distinction but an organizational one there is no official guidance on it yet, thus creating an uncertainty around the securities regulations.
For example, Filecoin plans to provide decentralized cloud storage service by taking advantage of unused hard drive space and has raised a record of $257 million in ICO for this venture.