Digital Assets: Let’s Talk about Tokens

Digital Assets: Let’s Talk about Tokens

Blockchain and distributed ledger technology in general have given birth to a dizzying array of new terminology, including terms like “crypto,” “coin,” and “token.” Learn below what a token is and what types of tokens exist.

What Is the Difference between Coins and Tokens?

Digital assets based on distributed ledger (a.k.a. blockchain) technology can’t be talked about without using the terms “coin” and “token.” Historically, two different concepts lie behind the supposed synonyms. Until recently, the term “coin” denoted cryptocurrencies like Bitcoin.

The delineation from the term “token” was – and still is – not always clear-cut. Coins and tokens both represent a certain value, both can be used to make payments, and both are exchangeable with each other. However, a cryptocurrency coin only works on its own digital ledger technology (DLT) infrastructure, or on its own blockchain in other words. All transactions involving the cryptocurrency coin are registered and saved on that blockchain. That’s why there is also the term “native coin,” which immediately makes it clear that this cryptocurrency is that blockchain’s medium of exchange, or “lubricant.”

What Is a Token?

The word “token” literally means something serving as an indication, proof, or expression of something else – a token is a sign, a symbol, a gaming piece, or even a voucher. In this sense, even a bookstore gift certificate for 20 francs is a token because, unlike a pure coin, a token can also represent an asset or a deed to an asset. A token ultimately is nothing other than the securitization of property, and the securitization of property in the digital world is called tokenization.

The wide range of potential applications for tokens has given rise to a vast terminology. Here below is one of the many extant categorizations of tokens:

Source: Kryptowährungen und der Dezentrale Finanzmarkt, Otter/Willmeroth, BoD, Norderstedt 2022

What Types of Tokens Exist?

The advent of initial coin offerings gave birth to a new regulatory dynamic and created pressure to come up with a clear and binding definition of terms. In its 2018 guidelines, the Swiss Financial Market Supervisory Authority (FINMA) confined itself thenceforth to using only the term “token,” which also encompasses coins. FINMA distinguishes three categories: payment tokens, utility tokens, and asset tokens.

What Are Payment Tokens?

Payment tokens are the same as the aforementioned cryptocurrency coins. Each digital currency exists on its own blockchain as a medium of exchange with no intrinsic value. Stablecoins are a special class of payment tokens. Stablecoins are less volatile cryptocurrencies because their value is pegged to one or multiple “external” assets such as the US dollar, the euro, or gold.

What Are Utility Tokens?

Utility tokens are digital vouchers that are backed by an issuer like Ethereum, for example. Purchasers of utility tokens can redeem them in exchange for a specific benefit such as a voting right or for a specific service like decentralized cloud storage space, for example.

Some utility tokens have a fixed maximum token supply. If demand increases and the supply of tokens is limited, the price of a token rises as a result. Investors can thus speculate on the value of the utility token appreciating over time. FINMA treats utility tokens held as investments as securities, just as it does asset tokens.That happens because while businesses contend with the ongoing recession in their day-to-day operations, investors are already evaluating the future potential for stocks. Not without reason it is often said that “the stock market trades on expectations” – expectations about the future growth of corporate earnings that shareholders of a company would like to profit from in the future.

When investors are confident that a company has the worst behind it, has cut costs, and has adjusted production to the new circumstances, they resume buying shares, and stock prices begin to rise. That explains why financial markets usually do not reflect the actual present state of the real economy, but instead anticipate its future development. That can even happen in the midst of a recession.

What Is an Asset Token?

An asset token represents a right of ownership over an asset. Asset tokens make it possible to trade novel assets as well as existing assets (e.g. stocks, bonds, or mutual fund shares) in the form of security tokens on a digital securities exchange like the SIX Digital Exchange. The spectrum of novel assets includes non-bankable assets such as real estate and art paintings. FINMA classifies asset tokens as an ownership claim on an asset, which makes them securities akin to stock shares from a regulatory perspective. By the way, the non-fungible tokens, or NFTs, that everyone is talking about these days are also classified as asset tokens.