Token represents a unit of certain value that is released by an organization and based on blockchain technology and serves in cases where cryptocurrency is unable to be used. They exist digitally and unlike the Bitcoins, they are not made from mining but are made by an individual or entity that already has some kind of digital currency.
Cryptocurrencies can be independent of a platform and token that is owned by a company is usually given to their investors during a public scale named ICO (Initial Coin Offering). ICOs are basically like the cryptocurrency version of crowdfunding and anyone can become an investor in a project they are interested in by purchasing the tokens of a particular DAPP.
Tokens can come in various different forms and can be used in many different ways. These are some functions that token can do:
- they can be used as a payment system between participants
- a digital asset
- a means for accounting
- a share in a company
There are two classes of tokens: utility tokens and security tokens. Utility tokens serve as an access to a certain product or service and they are in a digital form of value, like a gift card or software license.
But what are security tokens?
Security tokens represent an investment contract, where the main reason for blockchain technology users to buy them is the anticipation of future profits in form of dividends or most commonly price appreciation. To become the security token, the crypto token has to pass the Howey test and other standards. Because the token is deemed a security, it is subject to federal securities and regulations. The ICO have to respect the regulations or they will pay penalties.
The Polymath platform serves for connecting token investors, KYC providers, smart contract developers and legal experts who help the development of security tokens. Some people call Polymath, ,, Ethereum of security tokens”. With KYC/AML both investors and issuers can track their funds and only verified investors can buy, sell and exchange value. This platform can be the key for digital currencies trading in the future because many companies are looking for a platform on which they can rely on and safely invest their money.
Standards and the Howey test
The standards for security tokens are still not sufficiently well developed and applied, but there are some regulations respected mainly in the U.S.
The Howey test determines whether the currency qualifies to become a security token. Recently, the Exchange Commision (SEC) concluded that Bitcoin and Ethereum are not qualified to be securities.
This test will determine whether a certain transaction is an investment contract or not. The rules that need to be fulfilled are:
- it is an investment of money
- that investment is in a common enterprise
- the expectation of profit from the work of the promoters or the third party
The original Howey test used word “money” but later it included other investments and assets more than money. One more important thing is that token is declared a security if it’s not in the investor’s control.
SAFE and SAFT
Simple Agreements for Future Tokens (SAFT) was invented on the back of the Simple Investment for Future Equity contract. The main goal is to create a simple contract between a company and investor. When organization/company wants to raise money through cryptocurrency it needs to adhere to international, federal, and state law and this is where SAFT is used. For example, when a company sells an investor a SAFT, it is accepting funds from that investor but does not sell, offer, or exchange token. Investors are allowed to put cash into a startup and developers are using that cash to develop the network and technology for creating a functional token. After that, they provide these tokens to investors as they expect there will be a market to sell these tokens.
Security tokens in the future
Security tokens can find their application all over the world only with the help of standards and other regulations and for now, the best example is how they are regulated in the U.S. Security tokens can remove the need for middleman which reduces fees. Traditional bank transactions contain long and expensive processes, bankers and paper works that can be reduced with security tokens.