ICOs – What is a Token?

Token is a relatively new term in the business world but a key part of the vocabulary of those actively involved in the Cryptosphere particularly those involved in Cryptocurrency Coin Startups known as ICOs (Initial Coin Offerings).


In simple terms a Token can be described as a unit of value issued by a private company/entity.


Typically a Token is something that an organization creates to (a) self-govern its business model, and (b) empower its users to interact with its products. A Token also typically facilitates the distribution and sharing of rewards and benefits to all of the organization’s stakeholders.


A Token is an intrinsic component in a next-generation cryptocurrency 2.0 application. Like Bitcoin, it isn’t something that you can physically hold. Instead it is an electronic record – a kind of digital poker chip – stored on your computer, or mobile device. It securely records that you’ve made an entry level investment entitling you to certain rights once the business matures – Tokens are designed to let you participate in the project once it comes to market. Depending on what service the project offers, the Token will serve as a kind of access ticket to that service.


If the project is a software application for example that lets you find ride sharing partners without the use of a central website, then you might use tokens to pay for your rides.


From a Lawyer’s perspective a Token can be used in whichever way the person or organization designing and developing it decides. Ideally, from an investor’s viewpoint, a Token should entitle the investor to part of the Company’s revenue. Moreover a Token can admit several layers of value inside it, so it is the Token’s designer who decides what a specific Token will have inside.


Whilst Tokens bear many similarities to Bitcoins (eg they have a value attached to them which is accepted by a community and are blockchain-based), they typically serve a much wider purpose; Tokens are more than a currency because they can be used in a broader range of applications. Also, virtually all tokens rely on Ethereum’s blockchain protocol, which, is viewed by some Industry insiders as being more complete than Bitcoin’s blockchain.


From a Computing/IT Perspective Tokens are a representation of a particular asset or utility, that usually resides on top of another blockchain. Tokens can represent basically any assets that are fungible and tradeable, from commodities to loyalty points to even other cryptocurrencies!


From a Developer’s perspective the process to create a Token is a much easier than creating a Cryptocoin as you do not have to modify the codes from a particular protocol or create a blockchain from scratch; All you have to do is follow a standard template on the blockchain – such as on the Ethereum or Waves platform – that allows you to create your own Tokens. This functionality of creating your own Tokens is made possible through the use of smart contracts; programmable computer codes that are self-executing and do not need any third-parties to operate.


Tokens and ICOs


In the case of an ICO instead of a traditional fund-raising round, or even an IPO, companies offer Tokens – not shares – to the market, and investors typically use digital currencies like Bitcoin to pay for these Tokens. (Everything through blockchain.)


Unlike an IPO (Initial Public Offering), where investors receive shares in the Start Up Company, in an Initial Coin Offering, the Tokens are usually new digital currency units. These can be traded for other currencies or for the purchase and use of certain products developed by the start-up or licenses to run the software developed. In some cases, some ICOs issue their Tokens on existing digital currencies, where the Tokens represent voting powers in the invested project.


During an ICO, the investors buy Tokens at a previously established price which may vary depending on the stage the ICO has reached. Typically Token prices increase progressively as different investment thresholds are achieved, encouraging and rewarding early investors (ie ICO participants).


In a professionally run ICO model that raises funds by issuing Tokens, the Developers should:


  • Incorporate a Company
  • Publish its/their ICO rules
  • Present the Investor (ie a would be Token Purchaser) with a purchase agreement (and/or terms and conditions presented on the ICO website) drafted by a competent Lawyer which:

(a)    Clearly explains what the Investor is getting for his money ie what the Token can be used for (and/or how it can be used) and (b)

(b)   Makes it clear in the purchase agreement that the Token is not a security

(c)    Contains disclaimers warning the investor that the value of the Token could rise or fall depending on market and legal/regulatory conditions


If the ICO is incorporated Offshore (ie in a zero tax jurisdiction), profits realized by the ICO Founders/Promoters could potentially be banked and or reinvested tax free. (Check our Blog Article 5 articles down from this which explains, in detail, how).


Likewise anyone investing in an ICO can potentially bank his/her investment income/return and capital gains tax free by setting up a tax free Offshore Company as his/her investment holding vehicle.


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