Recently, Augur co-founder and Distributed Ledger editor-in-chief Jeremy Gardner profiled his changed attitude towards tokens in, “How One Investor is Riding the Cryptocurrency Token Wave,” a Bitcoin Magazine op-ed.

The piece was framed around the dramatic world of opportunity that tokens create both in opening up new funding opportunities previously off-limits to venture capital and in providing enormous liquidity to projects thus operating as useful, or perhaps revolutionary, financial instruments.

With an unprecedented amount of consumer money flowing into crowdsales — in April The Economist noted U.S. $107 million had already been invested this year — the conversation surrounding whether coin, or token, offerings will face Securities and Exchange Commission (SEC) oversight has heightened.

The overarching question remains: What is or is not a security in the realm of digital token assets?

The Vanbex Group discussed this in the blog post, Security or Not a Security, A Crucial Regulatory Question, explaining that, “whether a digital or blockchain-based token is a security or not should hinge on the types of rights or privileges embedded in the digital asset at the time of purchase.”

“Whether a digital or blockchain-based token is a security or not should hinge on the types of rights or privileges embedded in the digital asset at the time of purchase.”

Let’s look at Bitcoin and Ether, the two most well-known and discussed digital properties. While both properties carry value and can be bought and sold via an exchange, there is a very clear difference between their functions.

Bitcoin, much like digital gold, is a genuine cryptocurrency, developed post-recession as a decentralized alternative to fiat currency outside the scope of central banks. And while not yet formally regulated in the U.S., it operates like a security as it is purchased as an investment with the expectation of profit.

Bitcoin, much like digital gold, is a genuine cryptocurrency, developed post-recession as a decentralized alternative to fiat currency outside the scope of central banks.

Ether, though commonly grouped with Bitcoin as a cryptocurrency, is better defined as a utility token. Ether is the fuel by which the Ethereum platform operates. In other words, ether is the oil that greases the Ethereum network, facilitating transaction fees, whether for executing a smart contract, sending ether or any other transaction or process.

Ether, though commonly grouped with Bitcoin as a cryptocurrency, is better defined as a utility token. Ether is the fuel by which the Ethereum platform operates.

By consensus definition, a cryptocurrency is classed as a security when the issuance, or coin, is created as means for investment and potential profit. Cryptocurrencies classed as tokens are utility-based keys that allow access to a platform, as well as platform functions, like paying for transaction fees.

According to Balaji S. Srinivasan, CEO of 21.co, “The most important take home is that tokens are not equity, but are more similar to Paid API keys.”

The key is understanding a token’s use case. If it is deemed a utility or access token then it ought be considered outside the realm of securities regulation.

* Note: This article should not be considered legal counsel.