Cryptocurrencies were originally envisaged as a means of paying for goods and services in the digital era. Since those early days, the function of cryptocurrencies has become much more varied.
Although “cryptocurrencies” is commonly used as a collective term for these digital assets, they can be used for much more than just paying for your coffee. In this post, we’ll discuss different types of cryptoassets and what they’re used for.
The first cryptocurrencies were developed by people looking for an alternative to fiat currency for day-to-day transactions. Although the scope of blockchain technology has gone far beyond a simple payment system, many people across the world are still working hard to make crypto payments faster and smoother.
Bitcoin was the original cryptocurrency and is still the most popular and widely recognised cryptocurrency. It’s also the most widely-held coin, with an estimated 25 million bitcoin users worldwide. There are a number of cryptocurrencies designed as an alternative to Bitcoin, i.e. as a payment system first and foremost. These include Litecoin and Bitcoin Cash.
The number of merchants accepting cryptocurrencies as payment for goods or services is growing steadily. In the UK, you can pay for purchases at around 600 independent shops, bars and cafes using bitcoin.
One of the benefits of using cryptocurrencies for payment is that they’re borderless. Imagine travelling the world without having to worry about exchange rates, running out of the local currency or ending up with a wallet full of loose change at the end of your trip.
That is the future of payment currencies.
Privacy coins are also used for financial transactions but offer an additional layer of privacy. Part of Bitcoin’s ethos is that transactions on the network are open and transparent, so anyone can see how much bitcoin is being held in an individual wallet or track transactions between wallets.
For many people, the fact that their personal identity isn’t visible on the open network is a sufficient level of privacy. But in a world where it sometimes feels as if Google and Facebook are hardwired to our brains, not to mention our credit cards, some people just want their private lives to stay, well, private.
Privacy coins such as Zcash and Dash allow crypto owners to be completely anonymous. They’re not as widely accepted as bitcoin as payment in the real world but with increasing concerns about digital privacy and security of personal data, more mainstream adoption is only a matter of time.
Even if you’re new to crypto, you’ve probably heard of Ethereum. Although there are a few online stores where you can buy goods using ethereum, it was never intended to be primarily a payment currency.
Ethereum is a blockchain platform that helps people to build decentralised applications and digital assets on the blockchain through the use of smart contracts. If you’ve looked into some of the less common cryptocurrencies or had any involvement with Initial Coin Offerings (ICOs) you’ll likely have come across some ERC20 tokens. These are digital assets (tokens) that run on the Ethereum blockchain.
Digital platforms such as Ethereum Classic (which is independent to Ethereum), Cardano, EOS and Quantum work in a similar way. Essentially, they’re enablers to help developers use distributed ledger technologies.
Another platform you’ve probably heard of is Ripple. Like Ethereum, Ripple can be used as a currency, but it’s primarily designed to be a platform for large-scale financial transactions. Banks and financial institutions have shown a lot of interest in Ripple, as it’s a cheaper, more transparent and secure method of transferring money and other assets than traditional systems used by banks.
So, what do all those decentralised apps built on Ethereum and other platforms allow us to do? Well, this is where crypto gets really interesting – and confusing!
Whereas cryptocurrencies such as Bitcoin and Litecoin have their own blockchains, tokens operate on top of an existing decentralised ledger platform. They’re often used in crowdfunding campaigns (such as ICOs) or as a means of granting access to particular services or benefits.
Confusingly, there are lots of different terms used for different types of token, and these aren’t always consistent.
In the UK, the Financial Conduct Authority (FCA) recognises three types of token: exchange tokens, utility tokens and security tokens. Exchange tokens are designed for the buying and selling of goods – these are largely payment currencies, as we discussed above. Utility and security tokens are a little more complex, particularly when it comes to regulation.
The function of a utility token is to give you access to specific goods or a service.
Utility tokens can be used as a means of reward-based crowdfunding. For example, you may contribute to the funding of a project in exchange for receiving a discount or product once the project launches.
They can also be used as a means of exchanging value within a closed system, a bit like a supermarket rewards card. A similar application would be in the gaming industry. Gaming companies often make money from offering in-game content, such as special armour or weapons that players can buy to speed up their progress in the game. Rather than using pounds or dollars for these sales, a utility token can be used that’s specific to a particular game or company.
Security tokens represent a share of a business. Whereas you’d buy a utility token to access a company’s products or services, you’d buy a security token to invest in the company itself with an expectation of making a profit – similar to traditional stocks and shares.
According to the FCA, security tokens are classed as Specified Investments under the Regulated Activities Order (RAO). This means that similar regulations could apply to people providing advice on, or promoting, security tokens as currently apply to more traditional investment advice. The consultation on the FCA’s proposals on how to treat cryptocurrencies from a regulatory standpoint has only recently closed and final guidance is expected to be published in 2019.
The FCA’s approach differs slightly from the SEC in the US, which applies a piece of case law known as the “Howey Test” to determine whether a token should be classed as a security for the purposes of regulation. Under the SEC’s approach many ICOs which labelled themselves as selling “utility tokens” would actually be selling security tokens.
Cryptocurrencies have become well known for their volatility.
In the storms that shake the crypto sea, stablecoins aim to maintain a consistent price. They may be linked to a fiat currency (e.g. Tether maintains a $1 USD price), to a cryptocurrency or an asset such as gold.
The world of cryptocurrencies is nothing if not complex, particularly when you stray from the more popular coins and tokens.
That’s one reason we’ve been careful about which cryptocurrencies we offer on the cryptomonster platform and only handpick the most popular coins
As a UK-based business, we’re fully compliant with anti-money laundering laws and we comply with strict finance industry standards. Find out more about the coins we can help you purchase here.