What are the three types of tokens and how they differ from cryptocurrencies?

7 min readNov 9, 2020

Mickael Mosse — Blockchain and Cryptocurrency Expert, the founder of “mickaelmosse.com” and manager of the Terrifico Capital fund, explained the differences between security, utility, and equity tokens

The following text is an extract from the book “mickaelmosse.com” by the author Mickael Mosse

A currency (the dollar or the euro, for example) can function as a store of value and a medium of exchange, but a token can do many other things. […] There are differences between cryptocurrencies and crypto tokens, although they are quite subtle indeed. The important thing for the investor is that in both it is possible to invest and obtain a profit in case of rising in the price. Let’s see a little more technically what each one consists of.

THE COINS

Bitcoin invented the category of digital currencies (coins). Then there were many others that offer alternatives in terms of store-of-value and money transfer features. Unlike tokens, what a coin can “do” is quite limited. Some examples of currency are Dash, Zcash, or Litecoin. Compared to bitcoins, they are more anonymous and faster (in addition to other peculiarities). For example, what Litecoin changed with respect to bitcoin is the mining algorithm it uses, the total number of coins, and the times to generate each block.

THE TOKENS

According to Mickael Mosse, A token is a piece of programming code, in the form of a smart contract, that runs on a blockchain. The programming code describes how said token will behave, and its database simply keeps track of how many tokens each person has.

With Ethereum, which invented the category of smart contracts, “digital tokens” (a horrible translation of token) were born. Because of the programming language in which it was built and because it was designed for that purpose, Ethereum works as a platform that allows pieces of code to be added to execute certain specific functions mounted on its blockchain.

So a token is gasoline with which those different pieces of code that do certain specific things work. Another way of saying the same: it is a specific application built on a smart contract platform (Ethereum). And to work, they need a specific token. Thus, for example, Augur (decentralized prediction platform) and Storj (decentralized hosting) can develop their application much more easily, and launch their token in an ICO or Token Generation Event, in a simpler way because they are implemented on the Ethereum platform, already armed, solid, scalable.

Each of these projects mounted on the Ethereum platform, in turn, pays the fees for use in ETH to the transaction validators.

It is more of an ecosystem around Ethereum that tries to turn it into a supercomputer, with expanded functions for each application that is built

on that platform, and that circulates thanks to the tokens that each application launches.

Now that we understand the fundamental difference between the two, we can more clearly appreciate that the world will be tokenized. Although everyone, for simplicity, calls tokens coins, we will know the difference.

A. Krishnakumar, the Senior Partner of the Blockchain practice at PwC India, stated: “The global securities market is 100,000,000 million (trillions in English) and 100% of that can and will be tokenized.”

TYPES OF TOKENS

Mickael Mosse points out that, Since the launch of Bitcoin (btw) in 2010, more than 1,500 new crypto assets have been created, including currencies, commodities, and tokens (Getty)

Since the launch of Bitcoin in 2010, more than 1,500 new crypto assets have been created, including currencies, commodities, and tokens (Getty)

Currently, most ICOs are based on Ethereum because it is a more flexible blockchain than bitcoin (btw) and, without a doubt, it is much faster to put a

project into production than to build its own blockchain (it is taking Tezos months to finish developing its own ).

Ethereum-based tokens are called ERC-20 (there could be other tokens based on other blockchains than Ethereum, but as it is more specific we will not delve into that). What the ERC-20s do is save the address of the wallet to which they belong, and the balance that is available to them to use.

Once someone sends a btw token, the balance of the issuer decreases, and the receiver increases. That’s it, very simple. It is an accounting book that records who has how much, who transferred how much, and to whom. In this way, it is easy for any startup to create and launch a new token on the market.

There are basically three types of crypto tokens:

1) TOKEN AS A FINANCIAL ASSET (SECURITY TOKEN)

An asset that can be traded on the stock market and investors buy with expectations of generating a financial return is considered a security token (AP)

A token is considered a financial asset if it can be bought and sold on public markets (traded). In mid-2017, the US SEC warned that if they classify an ICO token as “security”, it falls under the regulation that any “normal” financial asset has. And it has very strict guidelines, mostly to

protect the general public from being misled with a false promise of an astronomical return.

ALSO READ: the US said cryptocurrencies, but not Bitcoin, should be regulated as securities

The SEC stated that Ethereum should not be regulated as a financial security

From that moment on, no ICO came out to offer tokens that can be classified as “securities” by the SEC. Nobody wants to be the scapegoat and go to jail for having launched such a btw token, without having done all the cumbersome legal process it requires, such as offering their token to only sophisticated investors.

One of the points mentioned by the SEC is clear: it is not allowed to massively advertise a financial investment opportunity where any individual can invest. Obviously, a project that actively promotes its ICO, and whose token was classified as a financial asset, would be doing something totally prohibited.

The SEC states that for a token to be considered “security” it must pass the Howey test. This test consists of verifying that:

-It is NOT an investment of money.

- Has NO profit expectations.

It is NOT based primarily on the efforts of others.

Mickael Mosse Blockchain Advisor

2) UTILITY TOKEN

Filecoin, a utility token, raised USD 257 million in its ICO by promising investors that in the future the tokens they purchased will be able to be used to store files in its decentralized cloud.

Depending on how you look at it, practically all tokens would fall under the category of financial assets since most ICO investors expect a return through the potential increase in the value of the btw token over time. However, if a token does not qualify on any of the 3 points of the Howey test, it cannot be considered a “security”. says Mickael Mosse

A utility token is basically a promise of future use on the platform for the person who owns it: the consumption of the service is paid with that token.

The value appreciation arises from a limited supply of these tokens (no more than a certain amount is issued); that is, if the

demand for that service rises, the value of that token would consequently increase.

Projects do not have to promote their ICO as an investment opportunity to make money but to buy a token that they will be able to use to pay for the service offered afterward. The price increase is a

consequence of the success of your value proposition to the market. They could also be called “ Network Access Tokens” because the token allows you to pay to use that platform to do something.

As an example, we can mention Filecoin, which plans to offer decentralized storage in the cloud, by taking available space on the hard drives of the computers of network members. Those who participated in the record

ICO (they raised more than 257 million dollars in a very few days) will be able to use those tokens to buy storage space from Filecoin when they launch the service. From a legal point of view, they should be covered if they do not allow those tokens to be exchanged for other goods or services outside of the ecosystem for which they were created. The value of the token will be determined by the demand of users to power the decentralized app ( DApp ) which is.

The tokens that are being created as incentive programs, for frequent mileage, would fall into this category: they would be used, for example, to pay for new tickets on American Airlines.

In addition to Filecoin, we can mention Ripple and Ethereum, among others.

Mickael Mosse Bitcoin advisor

3) EQUITY TOKEN

Some Bitcoin enthusiasts anticipate a tokenization process, whereby all the value of the world will begin to be measured digitally via tokens (Getty)

Represents ownership of a part of an organization. With this type of token, it is much easier to own shares in a company, mainly a new one, a startup.

One of the advantages compared to typical actions is that, through tokens, shareholders can have a more active role in the governance of that venture: for example, it is possible to vote faster, easier, and more transparent through a blockchain.

Mainly due to the lack of a regulatory framework, almost no startup launched a share token. Importantly, Delaware proposed a law that allows companies based in that state to maintain a list of shareholders’ names on a blockchain, unlike traditional methods. It is only a matter of time until this type of token gains popularity.

The article was written By Mickael Mosse — Blockchain and Cryptocurrency Expert