From network tokens to meme coins, a new framework aims to assist businesses in navigating the complex and evolving cryptocurrency landscape.
Cryptocurrency is defined as a digital currency designed to operate through a computer network, independent of any central authority like a government or bank. Initially, Bitcoin (BTC) was the sole cryptocurrency introduced in 2009, but the market has since exploded to include over 12 million different tokens. Differentiating them can be challenging, as they range from memecoins to utility tokens and security tokens, adding layers of complexity to the crypto ecosystem.
“Whether you’re launching a blockchain project, investing in tokens, or utilizing them as a consumer, understanding the differences is crucial. It’s important to distinguish between memecoins and network tokens.”
To clarify these distinctions, a new framework outlines seven categories of tokens commonly developed by entrepreneurs. Here’s a breakdown of these categories.
Network Tokens
Network tokens sustain a blockchain or smart contract protocol, deriving their value from the network’s operations. They typically have a clear purpose, such as supporting network operations, achieving consensus, facilitating protocol upgrades, or rewarding user actions.
These networks often include features like programmatic buybacks and token supply adjustments to introduce inflationary and deflationary forces. Trust is a key element for network tokens, aligning them with both commodities and securities.
“Both the SEC’s 2019 Framework and FIT21 have recognized that network tokens can be excluded from U.S. securities laws when trust dependencies are mitigated through decentralization.”
Examples of notable network tokens include Bitcoin, Ethereum (ETH), Solana (SOL), Uniswap (UNI), and Dogecoin (DOGE).
Security Tokens
Contrary to network tokens, security tokens are digital representations of traditional securities such as company shares or bonds, often offering unique features like profit-sharing rights. While less prevalent compared to other token types, security tokens remain subject to U.S. securities laws yet have been effective in raising capital for various ventures.
Company-Backed Tokens
Company-backed tokens are associated with an off-chain application, product, or service controlled by a centralized organization. These tokens may employ blockchain technology but primarily function in off-chain operations, granting the issuing company greater control over their issuance, utility, and value.
Due to their dependency on centralized systems, company-backed tokens could fall under U.S. securities regulations, especially when they involve investments or profits interests.
Arcade Tokens
Primarily designed for use within specific systems, arcade tokens are not intended for investment. They often act as currencies within virtual economies, such as gaming environments or loyalty programs. Their design discourages speculation, with features like an unlimited supply and limited transferability.
Collectible Tokens
Collectible tokens, widely known as non-fungible tokens (NFTs), can represent various forms such as artwork or digital memorabilia. While they may appear speculative, these tokens can provide substantive utility within specific contexts.
Asset-Backed Tokens
These tokens gain value from claims on underlying assets, such as commodities or fiat currencies. Asset-backed tokens can be fully or partially collateralized, serving roles like stores of value or hedging instruments. Their regulatory treatment depends on their structure and intended use.
Memecoins
Memecoins represent the more chaotic side of the cryptocurrency world, often driven by community hype and memes rather than utility. These tokens notoriously lack fundamentals, making them susceptible to manipulation and market volatility. While they typically fall outside U.S. securities laws, they remain subject to anti-fraud regulations.
