What Is a Token?

Digital assets based on distributed ledger (a.k.a. blockchain) technology can’t be talked about without using the terms “coin” and “token.” Historically, two different concepts lie behind the supposed synonyms. Until recently, the term “coin” denoted cryptocurrencies like Bitcoin.

The delineation from the term “token” was – and still is – not always clear-cut. Coins and tokens both represent a certain value, both can be used to make payments, and both are exchangeable with each other. However, a cryptocurrency coin only works on its own digital ledger technology (DLT) infrastructure, or on its own blockchain in other words. All transactions involving the cryptocurrency coin are registered and saved on that blockchain. That’s why there is also the term “native coin,” which immediately makes it clear that this cryptocurrency is that blockchain’s medium of exchange, or “lubricant.”

The word “token” literally means something serving as an indication, proof, or expression of something else – a token is a sign, a symbol, a gaming piece, or even a voucher. In this sense, even a bookstore gift certificate for 20 francs is a token because, unlike a pure coin, a token can also represent an asset or a deed to an asset. A token ultimately is nothing other than the securitization of property, and the securitization of property in the digital world is called tokenization.

The wide range of potential applications for tokens has given rise to a vast terminology. Here below is one of the many extant categorizations of tokens:

Source: Kryptowährungen und der Dezentrale Finanzmarkt, Otter/Willmeroth, BoD, Norderstedt 2022 

Often tokens are distinguished in three categories: payment tokens, utility tokens, and asset tokens.

Payment tokens are the same as the aforementioned cryptocurrency coins. Each digital currency exists on its own blockchain as a medium of exchange with no intrinsic value. Stablecoins are a special class of payment tokens. Stablecoins are less volatile cryptocurrencies because their value is pegged to one or multiple “external” assets such as the US dollar, the euro, or gold.

Utility tokens are digital vouchers that are backed by an issuer like Ethereum, for example. Purchasers of utility tokens can redeem them in exchange for a specific benefit such as a voting right or for a specific service like decentralized cloud storage space, for example.

Some utility tokens have a fixed maximum token supply. If demand increases and the supply of tokens is limited, the price of a token rises as a result. Investors can thus speculate on the value of the utility token appreciating over time. Not without reason it is often said that “the stock market trades on expectations” – expectations about the future growth of corporate earnings that shareholders of a company would like to profit from in the future.

When investors are confident that a company has the worst behind it, has cut costs, and has adjusted production to the new circumstances, they resume buying shares, and stock prices begin to rise. That explains why financial markets usually do not reflect the actual present state of the real economy, but instead anticipate its future development. That can even happen in the midst of a recession.

An asset token represents a right of ownership over an asset. Asset tokens make it possible to trade novel assets as well as existing assets (e.g. stocks, bonds, or mutual fund shares) in the form of security tokens on a digital securities exchange like the SIX Digital Exchange. The spectrum of novel assets includes non-bankable assets such as real estate and art paintings. By the way, the non-fungible tokens, or NFTs, that everyone is talking about these days are also classified as asset tokens.

Tokenization, i.e. the creation of a digital “token” that represents an asset or utility in virtual environments, is the gateway to a whole world of commercial applications. Everything could, in theory, be tokenized: from data (e.g. data needed to make an economic transaction), to identity, to art, to any digital file (as in the case of NFTs, non-fungible tokens representing a unique, verifiable, and exclusive asset).

The Markets in Crypto-Assets (MiCA) regulation is a landmark framework created by the European Commission (EC) that focuses on maintaining financial stability. It also is designed to protect investors and promote widespread transformation in the crypto asset sector in the EU. Titles III (concerning asset-referenced tokens) and IV (concerning e-money tokens) became applicable in June 2024. MiCA entered into force in June 2023, but the regulation will not be fully applied until December 2024.

On the other hand, the DLT Pilot Regime started applying in the EU as of 23 March 2023. It provides the legal framework for trading and settlement of transactions in crypto-assets that qualify as financial instruments under MiFID II, while facilitating the set-up of new types of market infrastructures, including DLT multilateral trading facilities, DLT settlement systems and DLT trading and settlement systems.

In Spain, the regulation of digital assets has focused on the prevention of money laundering and investor protection. Although there is no specific legislation that exclusively regulates crypto assets, several general rules apply, mainly transpositions of European regulations.

Besides, the Securities Market Act has been amended to accommodate crypto assets, and the CNMV circular on crypto-asset advertising regulates the advertising of crypto assets, imposing requirements of clarity and truthfulness in the information offered to the public.