Telling your utilities from your securities
While it may seem intuitive that crypto assets are equivalent to cryptocurrencies, particularly as the phrases are often used interchangeably—this oversimplifies the diversity of the crypto asset market.
Much like all crypto assets being digital assets, all cryptocurrencies are crypto assets—but not all crypto assets are cryptocurrencies. The crypto asset ecosystem is far more diverse, and a growing number of applications of cryptographic and blockchain technology have given rise to many iterations of crypto assets and tokens. Not all tokens are created equally, or for the same purpose.
While terminology employed by different technology communities and jurisdictional regulators can vary, there is relative clarity relating to the key characteristics of the three most common token types—cryptocurrencies, utility tokens, and security tokens.
Perhaps the definitive guide to crypto classification can be found in the working definitions employed by the Swiss Financial Market Supervisory Authority (FINMA), released in 2018 as one of the first regulatory attempts to offer clarity to the crypto sector. The summaries can be broken down into:
- Cryptocurrencies/Payment Tokens: all tokens which function as a means of payment—such as bitcoin, DASH, or Litecoin.
- Utility Tokens: tokens which exist with the sole purpose of conferring access rights to an application or service—such as Binance coin, Lisk, or the ZIL.
- Security/Asset Tokens: tokens which entitle holders to the underlying assets, dividends or interest payments – these tokens are “analogous to equities, bonds or derivatives” —such as Polymath tokens
Each of these token types is a crypto asset, but not all are cryptocurrencies. Understanding the differentiation between assets is imperative for navigating the crypto economy and understanding the value presented by different tokens.
Tomorrow’s economy, today — Why digital assets should matter to financial actors
Why does this matter? What relevance does the digital asset and crypto market have for financial actors? More, perhaps, than you might think.
Currently, crypto markets are worth an estimated 202 billion USD, and have previously soared to a total value of almost 781 billion USD.
While initially sceptical of this new breed of digital assets, majorly competitive banks and financial institutions have begun to recognise the potential of the market. Not least of them, JP Morgan, which has launched its very own cryptocurrency. While a varied cast of banks including UBS, Santander, Credit Suisse, and HSBC have been rumoured to have invested in a system to settle crypto payments.
Beyond the short term volatility of global crypto markets, there is no denying that the industry as a whole has consistently trended upwards—experiencing one of the fastest growth trajectories among different assets in the past few years. Furthermore, with the emergence of sophisticated services for crypto assets, there is greater opportunity for low-risk engagement with tokens of every ilk and kind.
While there may still be some uncertainty as to the exact nature of digital assets in financial circles, it would seem there is no doubt that they have a great potential in transforming various businesses as we know them today.
As renowned banks and financial service providers begin to embrace them more seriously, they are slowly being incorporated into the world of traditional finance—laying the groundworks for the future of the financial system, and a whole new conception of value. Understanding the industry today, will leave everyone better off tomorrow.