It is a common misconception that the existence of cryptoassets was ushered in by the arrival of Bitcoin in 2009. In reality, the concept of digital or cryptographic currencies significantly predates Bitcoin, and there were several attempts to create a digital, decentralised form of currency before Bitcoin, for example eCash and HashCash. However, whilst Bitcoin was not the first attempt at a cryptocurrency, it was the one that solved certain key issues, such as double spending and decentralisation, more effectively than its predecessors. In this sense, it was undoubtedly the cryptocurrency that propelled cryptoassets into mainstream recognition.
Since the introduction of Bitcoin, the world of cryptoassets has grown exponentially, and the market now consists of tens of thousands of different cryptoassets, each with their own functionalities, supposed use cases, and legal implications.
Are Coins the same as Tokens?
From a legal and regulatory perspective, the terms coins and tokens can and are used interchangeably in relation to cryptoassets, and both terms essentially have the same meaning when used in this context.
However, in cryptocentric terms, Coins and Tokens have very different meanings.
Coins are usually used to refer to those cryptoassets which act as native cryptoassets to their own blockchain. For example, Bitcoin on the Bitcoin blockchain, or Ether on the Ethereum blockchain. Coins are usually intended to function as a digital store of value or medium of exchange.
Tokens, on the other hand, are cryptoassets that operate on an existing blockchain network instead of their own. Whilst tokens can also be used in a similar fashion to coins, they are often created to fulfil different purposes to coins, for example to raise funds or give access to particular services. Some examples of tokens include Shiba Inu, Tether, and Basic Attention Token.
So, whilst most of the regulatory language in the UK refers to “tokens”, it should be remembered that this is not a reference to the crypto specific definition of a token, and is essentially used as a technologically neutral term in a legal and regulatory context.
Altcoins and Memecoins
An altcoin is simply a designation given to any cryptoassets which is not Bitcoin (and arguably Ether).
Many altcoins are designed to be used for a specific purpose or to address limitations and innovate upon existing blockchains. One of the first altcoins was Litecoin, which was forked (or simply put, an offshoot) from the Bitcoin blockchain, and offers faster transaction times than Bitcoin.
Memecoins are another subset of cryptoassets that often originate from an internet meme or joke, yet can attract serious following and price appreciation.
Memecoins often do not aim for any specific functionality or utility, and primarily gather attention through social media, viral marketing and online community engagement. They represent a fascinating microcosm within the cryptoassets world and can sometimes evolve into more refined projects with defined aims and utilities.
An example of a memecoin is Dogecoin, which experienced significant growth in a relatively short period of time, reaching a value of $0.68c at its all time high in May 2021, meaning it had a market cap of around $88 billion.
Despite the name, most stablecoins are usually tokens utilising existing blockchains – another quirk of usual crypto lexicon!
One of the endemic characteristics of cryptoassets is that they are extremely volatile, and while this volatility can be beneficial, it is one of the characteristics that makes cryptoassets unsuitable as a medium of exchange or store of value. Stablecoins exist to address the problem of volatility by pegging their value to an external reference, for example a commodity such as gold, or a fiat currency such as the US dollar.
Whilst all stablecoins maintain their value by some external reference, there are different types of stablecoins.
Some stablecoins are said to be fiat-collateralised – in other words, they are said to be backed one-to-one by reserves of fiat currency. An example of such a stablecoin would be USDC. For every USDC token in existence, there is an equivalent amount of fiat US dollar held in reserve.
Other stablecoins are crypto-collateralised and so they are backed by a reserve of other cryptoassets. They utilise smart contracts that automatically adjust the collateral to maintain a stable value. An example of one such stablecoin is DAI.
Some stablecoins are commodity-collateralised and reference the value of a physical commodity such as gold or silver and aim to maintain a peg to that value. For example, Tether Gold is said to be collateralised to gold.
There also exists stablecoins that are not backed by any collateral at all but aim to use algorithms to control their supply and demand and maintain a stable value. There has been increasing criticism of algorithmic stablecoins, particularly since the collapse of Luna and Terra USD in May 2022.
It is a noteworthy point that many jurisdictions are developing Central Bank Digital Currencies (CBDC’s) and some have already been implemented such as the eNaira in Nigeria. They are digital, similar to cryptoassets, and their value tends to be fixed to their country’s fiat currency much like a stablecoin. However, CBDC’s should not be confused with cryptoassets, particularly as CBDC’s are controlled by a central bank or monetary authority, while cryptoassets are typically decentralised.
Governance Tokens are a type of cryptoasset that allows holders to vote on decisions related to a particular platform or protocol. They act as a bridge between platform creators and the community of users and allow for an element of democratisation.
Examples of governance tokens include the Maker token (MKR), issued by MakerDAO. One MKR token is equivalent to one vote, and token holders vote on several issues including appointing team members and modifying fees.
Fan tokens are another form of cryptoasset that, in essence, represents membership of a fan club of a particular sports team, artist or celebrity. They often allow their holders to access fan membership perks such as voting on decisions, merchandise designs and rewards. They also often grant holders access to privileges such as exclusive content and ticketing privileges.
Football clubs such as FC Barcelona, Manchester City and PSG each have dedicated fan tokens.
Non-Fungible Tokens (NFT’s)
Non-Fungible Tokens (NFTs) are a form of cryptoasset that represents ownership or proof of authenticity of a unique item or piece of content. They are best thought of as assets that have been tokenised via a blockchain, and they are inherently unique in themselves, such that they are not interchangeable.
For example, a particular ETH coin is essentially no different to another ETH coin, and so they are interchangeable on a one-to-one basis. However, comparing two NFT’s, even though they may look the same will have independent and unique characteristics.
NFT’s can be used to tokenise a wide variety of assets from art and music, to real estate and event tickets.
Popular examples of NFTs include the Bored Apes Yacht Club collection and Cryptopunks.
The legal definition of cryptoassets that has been adopted in the UK includes NFTs, and this allows for them to be interpreted within the same framework as other cryptoassets which are deemed to constitute property. From a regulatory perspective, an NFT can be unregulated or regulated depending on the rights and obligations that attach to the NFT.
The High Court in England has already demonstrated its forward-thinking approach by allowing the service of legal documents via NFTs. As well as highlighting the flexibility of NFTs, this also highlights the English judicial system’s openness to integrate emerging technologies into practice.
Tokenised Real-world Assets
Another growing subset of assets within cryptoassets are tokenised assets that represent a share in a real-world asset, such as real estate, a luxury watch or handbag, vintage cars, and art. These usually utilise NFTs and allow for expensive assets to be broken down into smaller, easily traded units.
The legal and regulatory treatment for these can be complex and very much depend on the nature of the underlying asset which the token represents.
The landscape of cryptoassets is diverse and ever evolving, encompassing a range of asset types, many of which fall into one or more of the above categories.
Understanding and appreciating the legal intricacies of these various assets is imperative for both individual and institutional participants in this rapidly growing sector. As a UK-based law firm with a particular specialism in cryptoassets, Lawrence Stephens is uniquely positioned to provide expert guidance and innovative solutions to investors, creators and holders alike.
Please do not hesitate to contact our team who will be happy to discuss and identify your needs.