Introduction to Crypto-Asset ClassificationsReading Time: 5 minutes
Cryptographic assets are commonly referred to as cryptocurrencies. While anything with a value can be used as a currency, it will be useful to consider the various types of digital assets by the functions they serve. Many systems for classification have been made, and the crypto-taxonomy is still being defined. Why should we classify crypto-assets?
If you’re reading this, maybe you’re like me, simply curious about how cryptocurrencies are divided by various industry participants. We’ll begin with broad schema and gradually narrow down into specific classifications. Since assets of the same type tend to trade on similar indicators, it can be helpful to watch these groups of assets together to track the market sentiment. Dividing assets into classes can also help to helpful to divide one’s portfolio proportionally across the market. Let’s review a few prominent schema, and consider the different types of crypto-assets.
- Coin [or Commodity] vs. Token
- Currencies, Commodities, and Securities
- Single Tiered Classifications
- Brave New Coin: A General Taxonomy for Crypto-Assets
Coin [or Commodity] vs. Token
The terms coin and token are commonly interchanged. Technically speaking, a coin is a fundamental component of a blockchain. Such as in the case of Bitcoin, or Monero. Tokens are a secondary asset, built on a pre-existing blockchain, such as Binance Coin (BNB), Maker (MKR), or OmiseGo (OMG). The Ethereum blockchain has a coin Ether, with which its users may create tokens for any purpose.
In his book Cryptoassets, Chris Buniske divides assets into Currency, Commodity, and Token. Buniske makes the distinction between a raw digital resource provisioned (commodity) or a consumer-facing digital good\service (token).
Currencies, Commodities, and Securities
These may be used as regulatory labels, or practical. As far as the government sees them, crypto-assets fit into three basic categories: currencies, commodities, and securities. *These categories are not mutually exclusive.
A commodity is a basic good interchangeable with other goods of the same type.* Traditional commodities include corn, coal, ore, and oil. In an increasingly digital world, we can apply the label to our digital goods and resources. In the eyes of the CFTC all crypto-assets are commodities. Besides its taxable status, the regulatory implications of that are negligible. Crypto-commodities might include processing power, storage capacity, or network access.
The US SEC is a global regulatory leader who will prosecute anyone in the world conducting business with US citizens who do not abide by its laws. US Securities law rests on SEC vs. Howey Co. a 1946 Supreme Court trial. The Howey Company posed an investment contract as a simple land contract in order to circumvent securities laws. Any investment in a common venture where the purchaser expects profit from another’s effort is a security. Regardless of the platform’s purpose, if there is a central leadership involved, the SEC will come Knocking.
Early this year, prominent industry participants, including Coinbase, ConsenSys, R3, and Circle formed an industry body called GDF. Global Digital Finance was founded to collaborate on industry standards and regulation. Recently, GDF produced a Taxonomy for Cryptographic Assets, along with regulatory thought-leader FINMA. Both of those systems are similar to the one I describe from the US perspective. I expect positive developments from GDF in the coming years and for them to continue classifying assets further, beyond their simple tri-part regulatory classes.
Single Tiered Classifications
There are the crypto indices such as Tom Lee’s 5 crypto indices tracking commodities, platforms, privacy tokens, exchange tokens, and stable coins. Bitmain Recently procuded its own crypto index tracking Currency, Platform and Privacy coins.
Jake Ryan proposes that investors break crypto-assets into 6-12 mutually exclusive, all encompassing categories. To which he produces an arrangement of 8 asset classes for a properly allocated portfolio: Reserve, Currency, Platform, Utility, Securities, Commodities, Appcoins, and Stable coins. Don and Alex Tapscott’s “Blockchain Revolution,” applys an arrangement of 7 crypto-asset classes: cryptocurrencies, platform tokens, utility tokens, security tokens, natural asset tokens, crypto collectibles, and crypto-fiat currencies.
I mention these disparate systems to keep in mind the reasons for classification as well as the difficulty in creating an exhaustive system to stand the test of time. Indexes and Indices are made to track market activity, not classify the world of crypto. However, it’s still useful to remain aware of how prominent investors view the market.
A General Taxonomy for Cryptographic Assets
Throughout 2018, new multi-tiered systems for classification have arisen. We’ll have a brief look at the taxonomy Brave New Coin released this October. The accompanying paper explains that classification aids market participants in: determining the strengths and weaknesses among protocols by comparing them to others of the same type; assess the impact of crypto-segments on their traditional counterparts; analyze how a given sector is performing in your portfolio, and develop well a thought out investment strategy.
Brave New Coin refers to the 1997 paper “what is an Asset Class, Anyway?” by Robert Greer. Greer identifies three ‘superclasses’ of assets: Capital, Consumable, and Store of Value—further categorizing a range of assets within each super-class. Since crypto-assets can exist simultaneously within each of those classes, BNC takes the position they should have their own superclass alongside the three traditional asset superclasses.
Cryptographic assets are then divided into two subclasses: General Cryptographic Assets, and Protocol Tokens, which are then each divided once again, leading to four classes under which the many crypto-assets are divided. General is split into Payment and Platform, while Protocol Tokens are divided into Appcoins and Sidechains. Note: this classification is only for public permissionless chains whos tokens may be traded globally. Their taxonomy has adopted the North American Industry Classification System (NAICS), and additionally specifies unique industry niches, within each sub-class.
Now we’ve reviewed the various systems for classification and realized to some extent how many different applications Bitcoin’s cryptographic descendants make possible, while each still exists in its own category. Hopefully, this introduction gives us an appreciation for the many systems of classifications existing.
Besides those already mentioned, OnChainFx used to list 19 categories of crypto-asset. However, onchainfx.com/categories now points to messari.io/classifications which offers a different, multi-tiered, system. Furthermore, there is a HackerNoon Cryptoasset Classification the CryptoCompare Taxonomy Report 2018 and InvestInBlockchain’s Periodic Table of Cryptocurrencies to consider.
As these, more complex, arrangements seem to have come out over the past year, it will take some time to reach consensus on them, within the community. In the future I would like to review each of them to find where they agree and disagree, seeking the strongest arrangement. In the mean-time, this article is a good step in the direction of understanding the variety of cryptographic applications.
- Cryptoassets: the Innovative Investors Guide to Bitcoin and Beyond
- Key Considerations Under U.S. Commodity Laws (Part 2: The Regulation of Commodities )
- Metamorphosis: Digital Assets and the U.S. Securities Laws
- Investopedia: The Howey Test
- Digital Asset Transactions: When Howey Met Gary (Plastic)
- FINMA publishes ICO guidelines
- GDF: Taxonomy for Cryptographic Assets
- Fundstrat: 5 crypto indices
- Bitmain: Crypto Index
- Jake Ryan: (8) Crypto Asset classes
- Don and Alex Tapscott’s 7 crypto-asset classes
- BNC: General Taxonomy of Cryptographic Assets
- What is an Asset Class, Anyway?
- 19 types of Cryptoasset
- Cryptoasset Classification and Analysis of Crypto Sectors’ Historical Growth
- CryptoCompare Taxonomy Report 2018