The emergence of distributed technologies like blockchain and other DLTs has enabled the rise of digital tokens. These cryptographic tokens are easily issued at low cost, and facilitate collaboration across markets and jurisdictions, promising radically more transparent, efficient and fairer interactions between market participants. They can represent a store of value or a set of permissions in the physical, digital, and legal world. The ability to rapidly deploy tokens at low cost is a game changer. It creates a range of new asset classes, that can enable new business models that were not feasible before while improving the liquidity and transparency of new and existing asset markets. It is possible that the impact of tokenizing existing asset classes – like real estate, commodities, and securities – might by far exceed the impact of the new type of asset classes like native blockchain tokens.
While the existence of tokens in general, and digital tokens in particular, is not in and of itself new, the speed with these new blockchain based tokens are being deployed combined with the scope of value which these tokens represent, is by far unprecedented. Within less than a decade since the emergence of the Bitcoin Whitepaper in 2009, the world has gone from no cryptographic assets to a thriving ecosystem of around 1700 crypto assets listed on Coinmarketcap by the end of 2018. But while more and more people are starting to invest into cryptographic tokens, the understanding of the different token types out there is still limited. Even among professional investors and seasoned members of the blockchain community. To add to the confusion, terms like cryptocurrency, crypto asset, and tokens are very often used as synonyms.
The media mostly tend to refer to these new assets as “cryptocurrencies”. Often they use the term to describe a diverse range of cryptographic assets or “cryptographic tokens” that could represent anything from a physical good, a digital good, a security, a collectible, a royalty, a reward, a ticket to a concert, just to name a few options. I would, therefore, like to argue, that the term cryptocurrency is not ideal since many of these new assets were never issued with the intention to represent money in the first place.
A cryptographic asset would be a more generic term that one could use. However the term token is also generic, and with the rise of ICOs over the last few years, the term token has become somewhat omnipresent, describe a diverse range of cryptographic assets. While the lack of clear agreed upon terminology and definitions is a quite common one in emerging domain, precision in language and terminology is a basis for an informed, nuanced dialogue. This chapter will, therefore, try to give an overview of different types of cryptographic tokens, from a technical, legal and business perspective.
Definition of Tokens
As stated above, Tokens are not a new thing and have existed before the emergence of Blockchain. Traditionally, tokens can represent any form of economic value, like a Jeton as used in casinos, a voucher, a gift card, bonus points in a loyalty program, etc. Tokens are also commonly used in computing, where they can represent a right to perform some operation, or manage access rights, just to name a few examples. Cryptographic tokens on the Block chain combine both concepts: access right to some kind of economic value or permission to conduct some operation in a network which usually results in some kind of economic value. Tokens can, therefore, represent legal instantiations of a share of an asset, a set of permissions, or a set of claims.