About crypto coins and security tokens

Last week, the Belgian Financial and Market Authority announced that cryptocurrencies such as Bitcoin and Ethereum are not ‘securities’. And then currency. The Dutch translation of securities is ‘effects’. A collective term for tradable rights that represent an economic value such as stocks, bonds and options. Not all securities are subject to regulations such as the SEC in the US or the AFM in the Netherlands. Only if an ‘effect’ meets the following three criteria – the Howey test – does it fall under these rules. First of all, it must be an investment of money. There must also be an expectation of profits from the work of third parties in a joint venture. In short, the consideration is: does the profit come from your own work or from the work of a third party? Bitcoin and Ethereum do not meet these requirements.

Who issues the securities?

According to the Belgian FSMA, Belgian regulation is technically neutral and does not distinguish between whether an asset uses conventional methods or the new blockchain. According to them, the qualification of securities does not depend on the technology used. Negotiable instruments can be considered securities provided they have a formal issuer. It is precisely the formal ‘publisher’ that is missing with Bitcoin and Ethereum. A publisher that enhances an open prospectus with information for potential investors.

Already in 2019, the SEC clarified that Bitcoin is not a ‘security’ but a substitute for sovereign currencies: ‘. . . they replace a dollar, a euro, a yen with a bitcoin’. Therefore, they are not securities, but a means of payment. A more than interesting discussion because the debate about further regulation of cryptocurrencies often focuses on their impact status. Securities are traded on a stock exchange. Means of payment are exchanged through exchange offices. The tricky thing, however, is that these two concepts in the world of digital means of payment partly overlap and partly overlap each other.

Bureau de change versus stock exchange

We all remember the old exchange office where you could exchange gold for Belgian francs or German marks. Or euros for US dollars. Or Japanese yen. At these offices, money dealers exchange ‘regulated money’ at the daily exchange rate for that currency at the time. Smartly reacting to fluctuating exchange rates could certainly generate money, but an exchange office is certainly not a stock exchange.

In order to trade with cryptocurrencies, you must first convert or ‘exchange’ official means of payment, such as dollars or euros, into a digital currency. You need to go to a cryptocurrency exchange office to convert the desired number of dollars or euros into the desired cryptocurrency and have it deposited into your digital wallet. After all, there are no digital dollars or euros (yet?). Cryptocurrency exchange offices are called brokers. If you then have digital currency, you can trade it digitally on ‘a crypto exchange’ or invest in digital securities.

Exchange and trade in one.

The confusion arises because many cryptocurrency offices also trade and invest in cryptocurrencies. This combined service is widely offered. A broker can even manage your ‘wallet’ – your digital wallet – in which your digital currency is stored for you. Brokers work with various exchanges to optimize their cryptocurrency offerings. You can choose to only buy the cryptocurrency and use it to ‘invest’ and ‘trade’ yourself. Or you can let a ‘broker’ manage all your digital currencies – including your wallet.

There are trading bots today. Your digital money by having a linked bot – trading software based on digital algorithms – trade and invest with your invested investment. Basically the way merchant and securities banks used to manage their securities portfolios for clients. This can now be done fully digitally and automatically. You place your investment result entirely in the hands of the relevant trading bot’s algorithms. But not only national currencies can exchange value on a daily basis, so can digital currencies. This creates chains of exchange rate dependencies that make crypto trading so complicated. Security tokens are a solution to this.

security tokens

Cryptocurrencies exist in the form of so-called security tokens. These are tokens that represent digital assets. Represents possession or “transferred property rights”. To understand this, you need to understand what a “token” is. We know a token as chips in a casino, or coffee coins in a company or a train ticket in the train. A certificate that has value and you can use or exchange it for that value. This is also the case in the crypto world. There, tokens also represent value. This can be a financial value, but also an ownership right to a (digital) object. So, with tokens, ownership rights can be demonstrated and – possibly broken down into small parts – traded and transferred.

In data science, the term token also exists and means ‘value’, for example a randomly generated number assigned to sensitive data to mask the original information via encryption. In a blockchain, a token is a number assigned to data stored in that blockchain. Converting possession into a token is called “tokenization”. If that token represents a digital asset (singular of assets), that token becomes a ‘security’ or an investment such as a stock, bond and option. They are called ‘security tokens’. A company looking to raise money with a share issue may decide to collect that money digitally via security tokens. These tokens are then nothing more than the well-known shares. They are also considered securities by regulators when they meet the criteria of the aforementioned Howey test.

Other Security Tokens

Besides translating securities to ‘securities’, security also means ‘security’. In that case, a ‘security token’ is a ‘security token’. A physical electronic peripheral that can physically store the contents of your digital wallet. A physical wallet to store and secure your digital currency or assets. This is done with cryptographic keys and biometric data to generate a good and secure digital signature for access. You can get a lot of tamper-proof hardware to also physically – and thus offline – secure your digital assets.

Physical security tokens use various interfaces such as USB, NFC, RFID or Bluetooth to communicate with your computer and the underlying internet. All options to secure your digital identity, money and possessions in the physical world offline. Just like you need your personal seed phrase, the group of random words, to generate a crypto wallet, which you preferably write down on paper and keep it in a physically safe place. See also my blog ‘Seed phrase as the DNA of your ‘digital self’. It also makes sense to give your heirs access to these digital assets through the notary in case of (unexpected) death. After all, enough crypto capital has already evaporated. It will be a shame if that ever happens to your crypto capital…

By: Hans Timmerman (photo)

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