Token types

Tokens have become fundamental components with a variety of important functions in the cutting-edge world of blockchain technology and cryptocurrencies. There are many different token typologies available in the era of tokenization, where assets are digitally represented as tokens on the blockchain and each has its own unique properties, applications and rules. But do we really understand what a token is, the distinction between a token and a cryptocurrency, and their different types?

Understanding the definition of token

On platforms built on blockchain, tokens are digital units that represent money, property or rights. These digital assets are fully electronic, programmable, exchangeable and transferable. Their issuance and tracking is often decentralised, ensuring ownership and transparency of tokens, which can replace physical assets or particular functions in different applications. Tokens may be governed differently depending on their nature and intended use, which may be covered by financial and securities laws in various jurisdictions.

Different types of tokens

Below, we explain several reasons why tokenization is secure:

• Security Tokens: Security tokens are digital tokens that an investor uses to represent financial assets such as stocks, bonds or shares. Their primary purpose is to invest and seek returns, and they generally grant their holders economic rights such as dividends or interest, as well as occasionally voting rights.
• Utility Tokens: A type of token used to gain access to particular services or functions on a blockchain platform. The best use of these tokens is to "redeem" them in decentralised applications (DApps) for goods or services provided by the company, such as paying fees, receiving discounts or gaining access to more features.
• Governance Tokens: Governance token holders can participate in the governance and decision-making of a blockchain network or decentralised platform. Holders have the option to vote on protocol modifications or suggestions for improvement.
• Stablecoins: Tokens with a stable value are known as stable currencies and are usually combined with fiat money such as the dollar or the euro. While preserving the integrity and security of blockchain technology, they are used to facilitate transactions and prevent cryptocurrency voting.

How to detect a Security Token? Howey Test

To distinguish a Security Token, it is customary to use the "Howey Test", a set of standards used in the United States to determine whether a digital asset is categorised as a security and, as a result, is subject to security regulations. The Howey test has four main components and is based on a US Supreme Court ruling.

1. Money Investment: An investment of money is required for an asset to qualify as a security. This implies that purchasers of the asset must do so in the expectation of benefiting from it.
2. In a joint venture: The asset must be purchased as part of a joint venture or joint enterprise. In other words, the investors must join together in a business with a common objective.
3. Hope of gain through the efforts of others: To expect to make a profit, the efforts of others, such as the company's managers or promoters, must be a major factor. This indicates that investors have little influence over the performance of the asset.
4. Benefits of others' efforts: Investors' expected returns should primarily result from the work of others, such as management efforts on behalf of the company.

Where a digital asset satisfies all four criteria of the Howey test, it is likely to be classified as a security token and subject to securities laws. It is critical to remember that the application of the Howey test may change depending on jurisdiction and particular legal interpretations.

Main differences between tokens

Three crucial factors determine the differences between different types of tokens. To determine the appropriate regulation, it is first necessary to decide whether a token is considered a security, a digital currency or a utility. Secondly, each type of token has a main purpose, such as investment (security tokens), access to services (utility tokens), governance (government tokens) or stability of value (stablecoins). Thirdly, the regulation in Spain or the place where a token is purchased is important because it may differ according to the regulations in force in that country.

The main difference between a security token and a utility token lies in their function and purpose:

• Security token: A security token is a type of financial security that serves as a proxy for an investment in an underlying asset, such as stocks, bonds, mutual fund shares, or other types of financial assets. Investors buy security tokens in the hope of earning money through dividends, interest or other financial gains. o Regulation: Security tokens must comply with specific financial laws and disclosure requirements, such as prospectus issuance and financial reporting, as they are governed by securities regulations in many jurisdictions.
• Utility Token: A utility token has a broader purpose and is used to gain access to particular services, goods or features on a blockchain platform or network. Owners of utility tokens use them as a form of exchange to gain access to additional features or to make payments for services on decentralised applications or platforms (DApps). o Regulation: Utility tokens do not confer any economic rights, such as dividends, to their holders because they are not intended as financial investments. Their utility within a particular ecosystem determines their value.

Regulation in Spain for tokens

Although Spanish regulations on the different types of tokens are still open to change and evolution, they are already being applied in some circumstances related to securities and e-money. However, it is essential to keep in mind that laws may change over time. For accurate information on the status of regulations in Spain at this time, you should speak to your current legal advisor or your local regulatory body.

Below is a summary of how the regulation is implemented in Spain according to token category:

• Security Tokens: These types of tokens are governed by securities laws in Spain and are mainly under the supervision of the CNMV (Comisión Nacional del Mercado de Valores) because they represent financial securities. This includes the distribution of prospectuses and compliance with particular disclosure specifications.
• Utility Tokens: Depending on their particular purpose and intended use, these regulations may change. They may be governed by e-money regulations if their primary purpose is as a medium of exchange or store of value.
• Governance Tokens: The treatment of governance tokens, which allow owners to participate in the management of a blockchain network or platform, may or may not depend on its structure and intended use. The law may change.
• Stablecoins: They may be governed by laws similar to those for fiat currencies because they are linked to fiat currencies or other stable assets. E-money regulations may apply to the creation and use of stable currencies.

Regulations can be modified to take into account the development of the cryptocurrency and tokenization industries.