The terms coin and token are often mistakenly used interchangeably in the crypto space. It’s one of the growing pains of today’s decentralized web: The vocabulary is still very much a work in progress.
Adding to the confusion - or potentially clearing it up - are token generation events, a riff on the ICO fundraising model. But are they a necessary evolution to how projects raise money, or just a new way of selling old rope? We find out.
But first, we need to clear up a few things.
What are Coins?
Coins have been widely viewed as a new form of investment, though their value is based on an extremely volatile market that is also largely unregulated. Coins are primarily used as a storage unit of value as it relates to a particular company.
The most pervasive coin in the market is Bitcoin. It’s a form of digital currency capable of holding and exchanging value that is purely built off the namesake blockchain.
What are Tokens?
Tokens, on the other hand, sit on top of a respective blockchain, typically the more programmable and adaptable Ethereum and represents an asset or utility.
Tokens are tradable and can take the shape of commodities, loyalty points, or gaming avatars and are generated using a smart contract system.
Like coins, they share a lot of the same properties, though are mutually exclusive. Tokens run on a smart contract system that allows them to be far more programmable and functional than a coin.
A token has a role for the owner, a purpose for the company and a feature related to its ownership. For example, if you own a token, it can help raise engagement for a company by offering you voting power in terms of what projects get funding or not.
There are a variety of roles and uses for tokens, ranging from voting rights, exchanging value, access to premium services, currency use, and distribution earnings, to name a few.
In terms of regulation, the SEC, along with the Swiss Financial Market Supervisory Authority (FINMA), has broken up tokens into two camps, which we explore below.
What are Utility Tokens?
Utility tokens provide users access to a service that a company may provide. They allow holders to use a network and often offer voting rights. There is no inherent promise of profits, though the value of the tokens may fluctuate based on the supply and demand of the token availability.
These are not deemed as securities. But the regulatory environment is always changing, so don't take that as written.
What are Security Tokens?
This is a token that passes the Howey Test. In other words, these types of tokens derive value from serving as tradable assets and are subject to federal securities and regulations.
If tokens are generated or offered without abiding by these regulations, a company would be subject to fines and penalties. We did a whole article on Utility versus Security Tokens.
TGE vs. ICO, why does this matter?
Depending on what a specific company is trying to do, they can either go down the ICO route or a Token Generation Events, what’s sometimes referred to as a token launch.
An easy way to distinguish the two is that most services that run off the Bitcoin blockchain deal with coins while most dapps that work off the Ethereum blockchain operate in tokens.
While they ultimately serve the same purpose—a way to crowdfund and bootstrap a project—companies are careful in how they communicate their specific offerings in fear of fines and regulation.
A Token Generation Event is simply the creation of tokens by a company that is running off the Ethereum blockchain that typically is working in the utility space. Because these types of tokens are essentially tiny slices of a product, the creators typically refer to the token sales as token generation events or TGEs as opposed to ICOs.
As the market matures, there has been an increased focus from regulatory authorities to rule ICOs as a security, and thus be liable to tax. Token Generation Events are aligned in such a way as to not be securities, so as to not incur a tax penalty.
The debate over whether ICOs and TGEs would be classed as different products legally speaking is ongoing. The sphere is moving so quickly that it's difficult to pin them down, and we're sure we'll keep updating this piece as the marketplace matures.