Token (Cryptocurrency) Definition

| Publish date: 04/09/2018 (Last updated: December 13, 2018 10:28 AM)
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What is a Cryptocurrency Token?

The word “token” can refer to several different things, depending on the context:

  1. A description for any digital asset. For example, bitcoin is a token.
  2. A description of a unit of value. E.g. Bob has four bitcoin tokens. This use draws
    particular attention to the monetary value ascribed to cryptocurrencies.
  3. The nature of cryptocurrencies such that they transfer and store strings of data. The
    tokenization process is one of encryption, where by transactions are created and
    encrypted, then verified and logged onto a cryptocurrency’s underlying blockchain.
  4. Digital assets that are built upon another blockchain like Ethereum, e.g. ERC-20 tokens.
    In this case, tokens refer specifically to a platform’s unique cryptocurrency and often
    highlight its utilitarian value.

Though context will ultimately determine how the word “token” is used, it usually refers to a
digital asset that encrypts the transaction data recorded in it, in addition to the concept of a unit
of value.

The Importance of Defining “Token”

The SEC led by Chairman Jay Clayton has recently taken a tougher stance on cryptocurrencies
and ICOs. In order to avoid government regulation, many companies use the word “token” to
distinguish between a platform’s utilitarian coin and a more investment-like asset such as
bitcoin.

This usage revolves around the 1946 precedent established in the Howey Case, which ruled
that a security cannot be labeled as such if the profits derived therein stem from any direct
action by the investor.

If a platform’s ICO-issued token has a utilitarian value to the investor and can be used on the
platform– for example, to unlock a unique platform feature– the offering cannot be defined as a
security because it profit do involve “the efforts of others”, per the decision of the Howey Case.

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