Is there a difference between cryptocurrency and a security token?
The answer is yes, there is a big difference. And it is time we get these right so the thick fog around this topic can begin to clear up. It is very important to understand how each of them is very different from each other.
You probably read or hear these two words every day and in most cases in the wrong context. Before we get into the difference lets make one thing clear.
Crypto or Cryptocurrency is an alternate (i.e., non-fiat) CURRENCY
Security Token is an EQUITY POSITION IN A COMPANY
All over the web, there are many discussions, blogs, articles, and tweets on using blockchain. Of course, many of them follow to the extraordinary words “Crypto”, or “Cryptocurrency” and “Security Token”.
I am amazed by the number of people who use these two words interchangeably, yet they are so different as stated above. Let’s have a look at each one in more detail.
What is Crytpo or Cryptocurrency?
Wikipedia has a clear definition: “A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.”
Crypto or Cryptocurrency is just a currency. Other examples of currency are Dollars, Euros, Pesos, etc. These currencies are traded worldwide by currency traders. Nowadays we have the introduction of digital currencies such as Bitcoin, Ethereum, Litecoin, etc. Wikipedia has put together a list of these digital currencies.
Currencies are regulated by a securities commission or foreign exchange agencies. The rules around who can purchase currency and trade them are very simple. In most cases, it is required to be 18 years or older. ID Verification, AML (Anti Money Laundering), and some basic KYC (Know Your Customer) will be done. Not more than this is required to purchase a currency.
For trading, the platforms will need to be registered with commissions and/or regulators in their country to legally operate the exchange. This financial regulator is regulating the currency, transfer, and trading business.
What is Security Token?
In 2017 we saw the emergence of companies issuing tokens to raise capital. In countries such as USA and Canada, regulators have been very clear on this form of capital raising.
When a company offers a token from their company for an investor to invest in, the goal is for the token to trade and gain in value. Security agencies, including the SEC in the USA and the CSA in Canada, have made it clear that when companies are conducting a token offering in which the token has the ability to trade and gain in value, it must be issued as a security token.
Security Token is a tokenized security that is issued by a company. The security represents an equity position in the company. In order to issue the security, the company must comply with regulations as to how it can market the offering, who it can attract to invest in their company, reporting requirements, trading restrictions, and custodianship (Transfer Agent) requirements.
For a company to issue a security token it must:
- Determine what jurisdiction (countries) it wants to attract investors from
- Determine what exemption to use to offer their security token to investors (accredited or non-accredited investors)
- Determine trading restrictions per jurisdiction and exemption
- Determine reporting requirements per jurisdiction and exemption
- Determine Transfer Agent requirements per jurisdiction and exemption
- Determine if Broker Dealer is required per jurisdiction
- Determine what regulated ATS Secondary Market is available for trading
As you can see it’s clear how different these two are from each other and there should be no confusion going forward.
Here is how the two can come together and be used in the proper context. You can use cryptocurrency to invest in a security token offering by a company. But that can only happen as long as the company has agreed to accept this form of digital currency, the investor meets regulatory requirements, the company can offer their securities in the country (Jurisdiction) of residence of the investor, and if the company is using a broker-dealer, the dealer is also prepared to accept that form of payment.