Cryptocurrency is often used as an umbrella term for the various types of coins (currencies) and tokens (contracts) that use blockchain technology.
The main types of coins and tokens that can be traded include:
1. Tokenized securities
Tokenized securities are digital representation of the rights to a traditional security. They operate the same way as traditional securities, except that they can be stored, sold, and exchanged on blockchain networks. This results in a broader market reach and enhanced market liquidity.
Tokenized stocks benefit over traditional equity in several ways:
1. 24/7 trading
2. Fractionalized stock ownership
3. Worldwide Access
5. Automated compliance (regulatory compliance can be programmed into the smart contract)
6. Reduced costs and fees
However, tokenized stocks are not perfect and unfortunately, the asset collateral is nontransparent. Tokenized stocks are derivatives, but unlike traditional securities which require the holding of an asset to be transparent, there is no private placement documentation, proof of holding, or insight into the settlement process. This poses a risk for investors. Thus, there is a regulatory grey area for trading tokenized securities which will continually change as they gain popularity.
2. Security tokens
Security tokens bring the Distributed Ledger Technology together with new features that are determined by the individual design of each token. In other words, these tokens are programmable, unlike tokenized securities. Moreover, security tokens also face greater regulation than tokenized securities, as they are deemed financial securities. These must be issued, transacted and processed in agreement with the applicable federal securities laws in the regions they are allowed to be traded. In addition, since security tokens can be programmed with distinct features and ownership rights, they exist within a relatively unexplored landscape from both an innovation and regulatory perspective.
Top security tokens by Market cap: (February 2022)
1. Dignity Gold
2. INX Limited
5. Blockchain Capital
8. HCS Whisky Fund
9. FirstShot Centers LLC
10. SPiCE VC
3. Digital Coins / Currencies
Cryptocurrencies are the most common type of digital assets, using cryptography for security, and are designed to work as a medium of exchange.
4. Utility tokens
These tokens hold value within an ecosystem and can be used as inputs to produce other outputs. For example, a start-up may develop a digital product/service and issue utility tokens to investors. Investors may then use those tokens at some future time, to obtain access to the issuer’s products/service.
5. Stable Coins
Stable coins are digital assets that attempt to stabilise their volatility typically by pegging themselves to a stable asset such as the US Dollar or gold. Remaining in the cryptocurrency market means that the cryptocurrency market players can move between trades without having to wait days to transfer to fiat money.
Why use stable coins?
There are many reasons cryptocurrency market players use stable coins as opposed to traditional ‘risk-off’ assets. Firstly, remaining in the cryptocurrency market means they can move between trades without having to wait days to transfer to fiat money. Also, not all cryptocurrency exchanges support the use of fiat currencies, leaving stable coins as the only solution. Moreover, many exchanges charge fees for transferring crypto into fiat money, but don’t charge fees for exchanging between crypto currencies, so stable coins are seen as a safe (non-volatile) place to store crypto without accumulating fees.
6. Privacy tokens
Unlike other digital cryptocurrencies, privacy tokens conceal the information present in a transaction. Thus, these coins allow for a nondisclosure of identity providing users with financial privacy. Privacy coins work mostly in the same way as crypto currencies (they run on blockchains – decentralised ledgers – and are maintained by a network of anonymous validators), but they also use advanced technology to obscure the flow of money across their networks.
Top privacy tokens: (February 2022)
- Oasis Network
- Keep Network
Find out more about the Cryptocurrency and Token Landscape.
About Quod Financial
Quod Financial is a multi-asset OMS/EMS trading technology provider focused on automation and innovation – specialising in software and services such as Algorithmic Trading, Smart Order Routing (SOR), and Internalisation of Liquidity. Quod leverages the use of its data-driven architecture to support the demands of e-trading markets by combining AI/ML-enabled decision-making tools and dynamic market access with a non-disruptive approach to deployment. For more information visit: www.quodfinancial.com
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