Beyond “Security or Commodity”: Different Types of Digital Assets

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Moore & Van Allen PLLCIn a prior post, we discussed the recent proposed rules from the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) regarding certain non-public information reported to the SEC and the CFTC in the Form PF. Most of the rule is discussing information and requirements that are not related to or focused on digital assets. However, in one part, there is a proposal to request information from private funds about their “digital assets”.

The definition from the SEC and CFTC for “digital assets” is broad and all encompassing. As a result, the regulators have asked for comments on “Should we require more specific disclosure of what each digital asset represents?”

We only raise this point here to give pause. Often, discussions about the classification of a digital asset only focuses on regulatory implications of “Is it a security? Is it a commodity? Is it both?” Overlooked, could be the fact that the types and uses of digital assets is continuing to grow and appears to only be limited by the creativity and ingenuity of developers as more and more uses are realized by developers and entrepreneurs. A digital asset could be a currency itself on a particular network/distributed ledger (e.g., ETH), a more general store of value or way to exchange value (e.g., BTC), but more broadly a digital asset can represent anything from an asset (e.g., wrapped tokens), to an access right, right to a board ape picture or fraction of a piece of artwork, or an entry ticket to a concert.

Furthermore, there are several different properties that can be used to classify different token use cases (e.g., protocol tokens vs application tokens, fungibility, transferability, supply, token flow, stability, etc.). 

Appreciating all of this is also important to understanding not only where we are today, but where things could go, and then using this information to drive strategies, analysis and guidance.

To help provide readers some sense of the potential scope for “digital assets”, the chart below provides some use cases that are relevant to the DeFi/financial services space and are already operational or in stages of development. However, since there is no generally-accepted terminology that is widely used across the discipline regarding types of digital assets, our summary is just one way to view this world.

The types of digital assets are grouped together based on key characteristics. However, the different typologies described below are not mutually exclusive and some use cases may fit in several categories.

Category

Use Case

Examples

Stablecoins—Tokens designed to represent a store of value, medium of exchange, or unit of account that has a stable value against another currency or commodity.

Fiat-Collateralized Stablecoins— Tokens whose value is stabilized because they are pegged to the value of a fiat currency.

  • Tether
  • TrueUSD
  • Libra

Crypto-Collateralized Stablecoins— Tokens whose value is stabilized because they are backed by an existing digital asset, usually a cryptocurrency. Consistent price is maintained through the use of smart contracts. To obtain a crypto-backed stablecoin, a user offers cryptocurrency as collateral by locking it in a smart contract. The user may then withdraw their collateral by paying the stablecoins back into the same smart contract. Typically, these tokens are overcollateralized to account for crypto price volatility.

  • MakerDAO
  • Augmint
  • Reserve
  • StatiCoin

Commodity-Collateralized Stablecoins—Tokens whose value is stabilized because they are backed by commodities such as gold or diamonds.

  • Digix Gold

Central Bank Digital Currency (CBDC)—Tokenized representation of a country’s fiat currency issued by a central bank.

Many jurisdictions are exploring, or have already begun, tokenizing their currency, including*:

  • United States
  • United Kingdom
  • China
  • Canada
  • Australia
  • Brazil
  • Russia
  • European Central Bank

Synthetic Central Bank Digital Currency (sCBDC)—Token issued by private institutions and fully backed by central bank reserves.

  • Synthetix
  • Gemini
  • Universal Market Access (UMA)

Algorithmic Stablecoins—Tokens whose value is stabilized by algorithms and smart contracts programmed to expand or contract the supply of tokens in circulation based upon protocols that respond to changes in supply and demand.

  • TerraUSD (UST)/LUNA

Security tokens—Tokens that provide a way to represent, manage, and distribute rights of ownership and income distribution related to an underlying security.

Security Tokens—Tokens that represent an investment contract.

  • Bloom Tokens (BLT)

Crypto-bonds—Tokens that represent a unit of debt issued as a tradeable asset.

  • El Salvador’s Volcano Bitcoin Bond

Non-fungible tokens (NFTs)—Tokens that possess some property that makes them distinguishable from other tokens in the same class.

Tokenized art and collectibles—Tokens that provide a way to establish authenticity, provenance, use licenses, royalty rights, and rights to create derivative works for art or entertainment across all tangible or intangible media, including visual art, literary work, music, and film.

  • Cryptokitties
  • Bored Ape Yacht Club

Access tokens—Tokens used to represent any type of access right that is tied to a specific person, property, or event.

  • Coachella Keys

Utility tokens—Tokens that serve some function that is useful only within a specific ecosystem.

Governance tokens—Tokens that represent rights associated with network governance for a decentralized autonomous organization (DAO), including the right to vote on proposed changes to the protocol.

  • Maker (MKR)
  • Uniswap (UNI)

Privacy Tokens—Tokens that function using protocols designed to obfuscate transaction information.

  • Monero (XMR)
  • Dash

*for a more complete list, see https://kiffmeister.com/2022/08/09/retail-central-bank-digital-currency-current-landscape/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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