The cryptoassets environment is complex and evolving, with new products and regulations emerging all the time. This has led to some confusion over the many different types of cryptocurrency available.
For this reason, the Financial Conduct Authority (FCA) – the organisation responsible for supervising the UK financial services industry – has issued updated guidance in this area.
For example, cryptocurrencies such as Bitcoin and Ether are used to facilitate payment for goods and services and are known as either exchange tokens or payment tokens.
There are other cryptoassets which provide the holder with access to specified future products and services and these are known as utility tokens. But, unlike exchange tokens, these cannot be used to make purchases from third parties.
In addition, there are also crypto tokens such as e-money tokens and security tokens.
So, we have cryptoassets, cryptocurrencies, crypto coins, crypto tokens and payment tokens; a whole new world of confusing terminology, quite often used interchangeably and this article explains the differences between them.
FCA guidance on the different types of cryptocurrency
In July 2019, the FCA published its Final Guidance on the cryptoasset activities that it regulates. This publication provides clarification around which of these activities need to be authorised so that firms can take appropriate steps to ensure they are compliant.
The cryptoasset activities identified were classified as either unregulated or regulated and these are explained in more detail below.
This distinction is very important for retail investors as unregulated cryptoassets are not covered under the Financial Services Compensation Scheme (FSCS).
Unregulated cryptoassets:
Exchange tokens
Exchange tokens are cryptocurrencies such as Bitcoin, Ether (Ethereum), Litecoin etc which are used as a form of electronic payment for goods and services.
These payment tokens use a distributed ledger technology (DLT) platform and are not issued, controlled or supported by a central bank or other monetary authority.
These coins and any activity in which they are used is unregulated apart from enforcing anti-money laundering regulations and counter-terrorist financing.
Utility tokens
These are crypto tokens that provide access to current or future products or services.
The utility tokens include tokens used exclusively within a firm’s own network; tokens used to facilitate transactions through a firm’s own DLT platform; and transferable tokens that provide the holder with rights on a network.
Regulated cryptoassets:
e-Money tokens
Electronic money (e-Money) tokens meet the definition of e-money under the Electronic Money Regulations. They are issued on the receipt of funds and are also accepted as payments by third parties.
These include stablecoins such as Tether which are backed by a fiat currency (such as the Dollar, Euro or Yen), cryptoassets and other tangible assets.
Security tokens
Security tokens provide rights and obligations to investments other than e-money. These include ownership rights; repayment of a specific debt; rights to subscribe to future security tokens; and the pooling or sharing of profits.
Security tokens explained in more detail
The term security when used in an investment context means a financial instrument which has a monetary value assigned to it. Examples of securities include shares, bonds, investment funds, investment trusts etc.
Effectively, anything in which you can invest can be referred to as a security. If you buy a security such as a share in a listed company, then your ownership will be recorded on paper or a pdf file.
A security token, therefore, is simply a token on the blockchain that records the same thing. It is evidence that you own the underlying asset.
Security tokens have many advantages over the traditional system of record-keeping and are arguably the most important of all the different types of cryptocurrency:
- They can be traded any time of the day any day of the week. Stock exchanges are closed at weekends and have fixed opening and closing times during the week. Therefore, security tokens bring increased liquidity, trading volumes are higher, and markets can be truly global.
- More features can be added to the security. If you purchase shares in a conventional way, then you just own the share itself. With a security token, benefits such as a discount on purchases can be added for the owner or additional incentives can be included if the shares are held for a minimum number of years.
- Security tokens can be used for fractional ownership. For example, you could own a percentage of a valuable work of art. Such investments are highly uncorrelated with regular markets, potentially making them an excellent way to protect the value of your portfolio.
- They are a much less costly way of taking a business into public ownership. An Initial Public Offering (IPO) is expensive, with many regulatory hurdles to overcome before the shares can be issued. Security Token Offerings (STOs), however, can be organised much more efficiently and at significantly less cost.
Popular cryptocurrencies
To learn more about the different types of more popular cryptocurrencies, please click here.
