The creation of digital tokens and the embedding of underlying assets within these tokens entail a multifaceted process, leveraging blockchain technology for their issuance and management. This process, along with the regulatory landscape governing such transactions, varies significantly across jurisdictions, including the United States and Europe. Here is an overview that encapsulates the essence of your inquiry:
Creation of Digital Tokens
- Design and Purpose Determination: Initially, the entity behind the token must decide on its purpose (e.g., representing a physical asset, a share in a company, a right to services, etc.) and the blockchain platform on which it will be created (such as Ethereum, Binance Smart Chain, or others).
- Smart Contracts: The creation of digital tokens is executed through smart contracts, which are self-executing contracts with the terms of the agreement directly written into lines of code. These contracts govern the creation, distribution, and management of the tokens and can encode various functions, including the representation of the underlying asset.
- Token Standards: Tokens are typically created following specific standards (like ERC-20 for fungible tokens or ERC-721 for non-fungible tokens on the Ethereum blockchain) to ensure compatibility with wallets and exchanges.
- Underlying Asset Integration: To link a digital token with an underlying asset, information about the asset is embedded within the smart contract, creating a legal and digital link between the token and the real-world asset. This process often involves legal frameworks to ensure that ownership rights are properly transferred and recognized.
Large cryptocurrency transactions are processed through a series of well-defined steps, ensuring security and verifiability on the blockchain network. Here's a consolidated view of the process, based on information from BitPay and Coinfirm:
- Transaction Creation: The process starts with the sender creating and signing a transaction within a crypto wallet application. This involves specifying the recipient's wallet address, the amount of cryptocurrency to be transferred, and sometimes a transaction fee. The digital signature, generated using the sender's private and public keys, confirms the sender's identity and secures the transaction.
- Broadcasting: Once created, the transaction is broadcasted to the blockchain network. This involves sending the transaction details to a network of computers (nodes) that verify the transaction's authenticity and the sender's ability to complete the transfer. This verification includes checking digital signatures and ensuring the sender has sufficient funds.
- Confirmation and Addition to the Blockchain: After verification, the transaction awaits in a mempool (memory pool) until a miner (in Proof of Work systems) or a validator (in Proof of Stake systems) selects it for inclusion in the next block. This selection can depend on the transaction fee attached; higher fees can prioritize a transaction for faster processing. Once a transaction is included in a block and appended to the blockchain, it is considered confirmed, and the funds are transferred to the recipient's wallet.
Transactions are not completely anonymous; they are pseudonymous and traceable through the blockchain's public ledger. While the blockchain records all transaction details, the identities of the participants are not directly linked to their public addresses, offering a degree of privacy. However, the transaction flow and wallet addresses involved are publicly viewable, ensuring transparency and traceability within the network. Regarding the payment of large tokens, the process remains the same. However, large transactions might attract more scrutiny from miners and nodes due to the significant value being transferred. Additionally, given the transparency of blockchain networks, large transactions can be easily tracked through block explorers, tools that allow anyone to view transaction details and statuses on the blockchain. For businesses and individuals processing large crypto transactions, using a payment processor like BitPay can simplify the process by generating invoices and handling the conversion of crypto to fiat currencies if desired, offering a bridge between traditional financial systems and the crypto economy.
Selling Tokens in a Bid Procedure
Selling tokens, including NFTs (Non-Fungible Tokens), through a bid procedure can be an effective way to realize their value in the market. This process often involves auction mechanisms, similar to traditional auctions but adapted for the digital asset space.
- Choose the Right Platform: The first step is to select a suitable marketplace that supports the auction model for selling your tokens. Popular platforms include OpenSea, Nifty Gateway, Rarible, Foundation, and SuperRare. Each platform has its own set of rules and fees, so it's important to choose one that aligns with your needs.
- Prepare Your Token for Sale: If you're selling an NFT, ensure it is minted and ready for listing. For other types of tokens, make sure they are transferable and that you understand the process required by the platform to list them for sale.
- Set Up the Auction: Depending on the platform, you may have options such as Timed Auctions, Dutch Auctions, or auctions with participant admission (open or closed). In a Timed Auction, the highest bid at the end of the auction period wins. In a Dutch Auction, the price decreases over time until a buyer accepts the current price. Open auctions allow anyone to participate, while closed auctions restrict participation to a select group.
- Determine the Value: Setting a reserve price is critical. This is the minimum amount you are willing to accept for your token. Factors influencing the value include rarity, utility, and liquidity. Rare tokens, those with specific utilities, or those on platforms with high liquidity tend to fetch higher prices.
- List Your Token for Auction: Follow the platform’s process for listing, which typically involves specifying the auction type, setting a starting bid or reserve price, and determining the duration of the auction.
- Promote Your Auction: Utilize social media and other channels to attract potential bidders. The more visibility your auction gets, the higher the chances of receiving competitive bids.
- Conclude the Auction: After the auction ends, the platform will typically handle the transfer of the token to the highest bidder and the payment to you, minus any fees. Some platforms may extend the bidding period if bids are placed near the closing time to ensure all interested parties have a fair chance to participate.
- Transfer of Funds and Token: Once the auction concludes and the highest bid is accepted, the platform will facilitate the transfer of the token to the buyer's wallet and the sale proceeds to your account, according to the payment methods supported by the platform.
By carefully selecting the right marketplace, properly setting up your auction, and actively promoting it, you can successfully sell your tokens through a bid procedure. This process not only ensures that your tokens are sold at a fair market price but also provides transparency and security for both the seller and the buyers involved in the transaction.
Regulation in the United States
In the United States, digital tokens can be regulated as securities, commodities, or under other legal categories, depending on their characteristics and use cases. The Securities and Exchange Commission (SEC) oversees tokens that qualify as securities, applying the same rules as for traditional financial instruments. The Commodity Futures Trading Commission (CFTC) regulates tokens considered as commodities. Additionally, various state laws may apply, adding another layer of complexity to compliance.
Regulation in Europe
European regulation of digital tokens is evolving, aiming to provide a harmonized framework across member states. The Markets in Crypto-Assets (MiCA) regulation, proposed by the European Commission, seeks to create a comprehensive set of rules for crypto-assets, including those backed by underlying assets. MiCA focuses on consumer protection, operational resilience, and market integrity, covering issuers of crypto-assets and service providers in the EU.
The creation of digital tokens and their regulation is a complex domain, requiring careful consideration of technological, legal, and regulatory aspects. Entities looking to issue such tokens must navigate a labyrinth of laws and regulations, which are still in the process of evolution, especially in light of the rapid innovation and adoption in the blockchain space. In both the United States and Europe, the regulatory framework is designed to protect investors, ensure market integrity, and prevent financial crimes, with ongoing developments to address the unique challenges posed by digital assets.
Investors can choose from many types of crypto coins and Tokens, including:
- Payment tokens: Cryptocurrencies like Bitcoin and Ethereum are well-known payment tokens. Payment tokens can be used to complete transactions wherever that cryptocurrency is accepted.
- Security tokens: Tokens that are backed by an underlying security, such as real estate. The tokens represent and convey ownership and are commonly fractionalized (or fungible tokens). HoneyBricks security tokens represent real ownership of high-quality commercial real estate.
- Utility tokens: Tokens that have a specific use case within a blockchain or crypto ecosystem are called utility tokens. Filecoin is an example of a utility token that facilitates decentralized data storage.
- Governance tokens: Tokens that enable users to participate in the governance of a blockchain are called governance tokens. Uniswap and Compound are examples of governance tokens.
- Basic attention tokens: Users can be paid for their attention, such as to digital advertising, using basic attention tokens. The best known basic attention token is affiliated with the Brave browser network.
- Gaming tokens: Investors can own coins that both have in-game value and are traded on third-party exchanges. Decentraland’s MANA is a prominent example of a blockchain-based gaming token.
- Non-fungible tokens (NFTs): Investors can own digital tokens that signify ownership of a specific asset. These types of tokens are “non-fungible” because the underlying assets are not interchangeable.
Diversify by industry focus
Another way to diversify your crypto or blockchain portfolio is to invest in cryptocurrency projects which are focus on different industries. Blockchain technology is being applied to—and disrupting—many sectors.
You can expand your crypto portfolio into industries such as:
- Healthcare: Blockchain technology can make the healthcare sector more efficient and secure. Investors can buy healthcare-focused cryptocurrencies like MediBlocand Dentacoin.
- Supply chain: Blockchain tech can make supply chains more transparent. VeChainis an example of a cryptocurrency designed for the supply chain industry.
- Transportation: Many aspects of the transportation sector can be innovated and improved using blockchain technology. Transportation-focused coins include Mass Vehicle Ledger and ParkinGo.
- Entertainment: Blockchain platforms can support a variety of entertainment options, and entertainment companies can integrate blockchain technology. Some entertainment coins include ApeCoin and Reef.
- Climate change: Blockchain tech can support initiatives to fight climate change. Climatecoin is an example of a digital currency that facilitates transparent investments into sustainability projects.
- Real estate: Investors can use blockchain technology to access fractionalized real estate investments. HoneyBricks supports a marketplace of blockchain-based real estate tokens.
- Private equity: An alternative asset class which is generally organized as limited partnerships, that buys and restructures companies. Some private equity funds have started tokenizing their fund to allow smoother buying and selling of the underlying shares in the fund.
Crypto market investors can also diversify across industries by investing in public companies that are pursuing blockchain projects. Using this strategy, investors’ options may be limited to publicly traded companies that are meaningfully pursuing a blockchain integration strategy.
Diversify by asset class
Crypto and blockchain investors have many options across asset classes to diversify their crypto portfolios.
These are other major asset classes that can provide portfolio diversification :
- Stocks: Investors can buy stocks of companies focused in the crypto sector, or stocks of companies with large cryptocurrency holdings on their balance sheets. Many crypto mining and hardware companies are publicly traded, while companies like Microstrategy have substantial crypto holdings.
- Bonds: Investors may be able to buy blockchain-based bonds that are digitally issued or own bonds that invest in cryptocurrencies like Bitcoin. The World Bank, the European Investment Bank, the Singapore Exchange, and El Salvador have each issued blockchain-based or crypto bonds.
- Real estate: Investors can buy blockchain-based real estate tokens to gain exposure to the world’s largest asset class. Real estate tokenization platforms like HoneyBricks support fractional ownership of real estate through digital tokens.
Diversify by investment vehicle
If portfolio security is a perceived area of risk, investors can choose to diversify their crypto holdings across various investment vehicles and account types, including:
- Digital wallets: Investors can use different digital wallets to facilitate the direct ownership of digital coins, including special-purpose coins like NFTs and real estate tokens.
- Taxable brokerage account: Investors can hold crypto-focused securities investments in a taxable brokerage account. Brokerage platforms like Robinhood, which supports cryptocurrencies, can enable investors to also own digital assets in this account type.
- Cryptocurrency IRA: Crypto investors can establish self-directed individual retirement accounts (IRAs) to invest in digital assets. Crypto IRA platforms can assist investors with the administrative burdens traditionally associated with self-directed IRA investing.
- Decentralized financial products: Blockchain-based decentralized finance (DeFi) platforms can support a variety of ways to invest and hold digital assets. Investors can access decentralized savings accounts, staking platforms that produce interest income, and other blockchain-based investment vehicles.