3 things you need to know about 3 types of token classes

There’s no question about it: the cryptocurrency markets have been growing for years. In fact, global DeFi market is projected to be worth $232 Billion by close of 2030.. The DeFi sector is also giving rise to a more robust crypto ecosystem. If you want to understand crypto, here’s what you need to know about three types of token classes.

What are security tokens?

A security token is considered a “security,” because it is meant to act as an investment. The token’s value is directly tied to the company issuing the token, or it can also be an investment contract tied to a real-world asset. 

They also receive the standard protective regulation that securities have. A security token offering, or STO, is different from a standard initial coin offering, or ICO. These tokens are meant to bridge the gap between the traditional finance world and the cryptocurrency world. 

Tokenization allows companies to issue securities but leverages blockchain technology to do so. Security tokens have some obvious advantages over standard securities, thanks to the fact that blockchain is transparent and immutable. Of course, the fact that security tokens can offer faster settlement times and can be traded 24/7 are other obvious benefits.

The ultimate goal of a security token is to offer regulated securities by leveraging blockchain technology. Some examples of security tokens include tZERO, a security token for the first regulated security token exchange in the US, and Nexo, a security token for crypto-backed loans.

What are utility tokens?

We all know that tokens have monetary value, and many investors hop into the cryptocurrency markets because they are hoping that their tokens will increase in value. However, utility tokens are actually meant to be used for a specific purpose. This focus on functionality is what separates the utility token from other token classes.

A utility token enables future access to specific products or services. One obvious example of a utility token is the Binance Coin. The Binance Coin, or the BNB token, acts as a discount token for the millions of Binance users worldwide who are trading cryptocurrency. Ethereum also has a utility token called “Ether”. 

It should also be noted that many blockchain-based startups have claimed that their initial coin offerings, or ICO, are selling utility tokens specifically to sidestep securities regulation law. Utility tokens are largely unregulated, unlike security tokens.

What are payment tokens?

Of course, many cryptocurrencies are not focused on specific functionalities or being tied to an external asset. Bitcoin is the crypto most used as a store of value, and many consider it a payment token. Monero is also considered a payment token, since it is a cryptocurrency focused on allowing for private and untraceable transactions. 

The main two categories of tokens are utility tokens and security tokens. However, you will still see the term “payment tokens” sometimes used to describe a coin used to pay for goods or services.

What does future regulation look like for crypto token classes?

These crypto token classes all serve a specific purpose. Bitcoin, a payment token, is the cryptocurrency that is most critical to the overall stability of the cryptocurrency markets. Ethereum is also incredibly important for the development of additional cryptocurrencies, platforms, NFTs, and dApps.

There are still so many questions that must be answered. Where exactly does a stablecoin fit in within the token classes, and should it be considered a security? Will the SEC eventually offer some more concrete ICO regulations? If the world begins to tokenize trillions of dollars worth of assets, will regulation be able to keep up with the cryptocurrency sector’s innovation?

Many believe that security token offerings will eventually replace initial coin offerings, because they make it much easier for regulators to embrace. However, it is impossible to tell exactly what the future of crypto regulation looks like, given the fact that there is so much debate regarding how and why cryptocurrencies should be categorized and classified.