How token differs from cryptocurrency

History of the term

The concept first appeared in England in the 17th century. Correctional institutions of the country suffered from a shortage of cash, they rarely reached the colonies. Each prison issued its own coins, which were used within its limits. Such money could be used to buy goods sold within the colony.

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From the English language, token translates to “sign, token, symbol.” They act as discount cards, gift certificates. They provide the owner with a benefit – a discount on goods, additional time or distance. At the same time, you can not pay for goods with a coupon, you need the usual monetary unit of the country.

How token differs from cryptocurrency

The digital world is organized similarly to the real world. The main differences between token and cryptocurrency:

• The former use someone else’s blockchain.
• The latter are based on their own decentralized system.

There are centralized (run by a company) or decentralized (run by an algorithm). The price depends on the balance of supply and demand, is formed under the influence of rules, binding to another asset.

Difference from coin

Coins are identified with cryptocurrency. Coins are one of the categories of digital assets:

• Has its own blockchain.
• Uses cryptographic algorithms to operate.
• Is a means of payment.
• Issuance occurs by mining, staking.

Token is created in someone else’s blockchain – Ethereum, Solana, Polkadot, Polygon and other projects. It does not always act as a means of payment, its issuance occurs once at the start of the project.

Areas of application

Cryptoassets perform 2 main tasks. They act as:

• A digital key.
• A financial instrument.

Digital key

Provides information security of the blockchain and is used to identify the owner. Token serves as a key to access information stored in the distributed network.

Financial instrument

This is the primary purpose. In an initial coin offering (ICO), records in distributed registries act as a surety to an investor for financial assistance to the project. It is possible to pay out (only within the ecosystem) or receive profits (dividends).

In this context, the categories listed in the table are distinguished:

Howey Test

In the US, stock transactions are governed by 2 major laws:

• “Securities Act” of 1933.
• “On the exchange of securities” from 1934.

According to the provisions of the statutes, only accredited investors can perform asset purchase transactions. They include persons whose total income is not less than $200 thousand per year or net capital more than $1 million. They can invest their money in any type of funds, invest in new projects.

To determine the relationship of assets to securities, the U.S. Supreme Court uses the Howey test, which was developed for this purpose. It is possible to pass the test if the conditions are simultaneously met:

• The transaction is made for the purpose of investment.
• The transaction results in income.
• Investment in a joint venture.
• The transaction will result in a gain.

The securities are subject to registration with the Securities and Exchange Commision (SEC).

Conclusion

Let’s summarize briefly what is the difference between cryptocurrency and token. Coins can be used to buy goods, pay for services or work. Cryptoassets have many other functions, which depend on the specific project, goals and objectives.

Frequently Asked Questions