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Bitcoin, Bitcoin, Bitcoin. The daily price of Bitcoin, the leading exchange cryptocurrency, is a topic of national conversation in the media. One of the more significant aspects of Bitcoin from a social perspective is that it likely represents how most people around the world first learn about cryptocurrencies.
Today, individuals and companies leverage digital assets such as cryptocurrencies and tokens in complex and comprehensive ways. One such method uses digital assets in the form of tokens to represent value within a network. Such tokens can represent stock holdings and other features, and can be used to generate investment throughout the lifecycle of a company.
One innovative new use of crytocurrencies are initial coin offerings (ICOs). Put simply, ICOs are a business fundraising event similar to an initial public offering in which investors purchase company-issued tokens with digital currencies (i.e. Bitcoin) for equity stake in the organization or its member network. ICOs represent an intriguing and innovative new route for companies to secure the capital they need to grow and thrive – but not without complication or drawbacks.
This blog post contains two parts. Part I below outlines the three most common forms of crypto tokens used for ICOs (security tokens, equity tokens and utility tokens) and how they are currently used in practice as part of an offering. Part II, coming in January, will further explore the implications of each in the contemporary social and legal landscape.
Security Token: Defining a security is prerequisite for a security token discussion. Securities are any kind of tradable asset, including stocks, bonds, mutual funds, etc. Therefore, security tokens are tradable assets for those who hold them, capable of providing dividends in multiple forms. As would be expected, companies using security tokens to garner investment would need to do so in accordance with the rules of the appropriate governmental authorities, for instance the U.S. Securities and Exchange Commission. The ramifications of choosing whether or not to do so will be discussed in Part II of this blog post.
Equity Token: Equity tokens are a category of security token that may be particularly useful for early-stage companies looking to raise funds. In their most basic form, equity tokens allow companies to sell stock in their companies through coin purchases. What makes equity tokens more intriguing than traditional investment measures is how the blockchain transforms equity ownership for investors. The presence of a blockchain allows for transparency of ownership as well as corporate voting, which can also be captured and stored in more transparent ways. As a category of security token, equity tokens must be issued in accordance the rules of the appropriate governmental authorities to ensure that they are legally executed. Part II of this post will also explore other requirements for the success of an equity coin.
Utility Token: Utility tokens differ from securities-backed tokens because they do not rely on the expectation of profit. Instead, utility tokens provide users with access to a useful service or product. For example, six major banks including UBS, HSBC and Credit Suisse have developed their own utility coin planning to launch in 2018 that represents interbank payments, thereby reducing the need to rely on the sluggishness of traditional money transfers or brokers. Utility tokens can come in an endless variety of flavors and are not subject to governmental regulation so long as companies can explicitly demonstrate that the tokens are not securities-backed. However, utility tokens are not without their own limitations. Some of these limitations will be covered in Part II.
Initial Coin Offerings (ICOs) are a nascent form of business fundraising that will likely grow in popularity across the coming years. Stay tuned to Part II that will discuss some of the strengths and limitations of each category of token offering.