Global Trends In Crypto Regulation: Implications For Zambia Part 2

The discussion above hints that crypto objects are more accurately and helpfully understood by their purpose rather than being uncomfortably pigeonholed as a class of financial asset. The uses and functions of various crypto tokens introduce varying risks to individuals, corporates, and financial infrastructures and are accordingly serving as a basis for distinction in regulatory regimes. 32 Categories of crypto objects vary across sources and tend to bleed into one another, but typically include:

● Unbacked digital currencies: Native tokens, like Bitcoin, that are issued and exist on a distributed ledger, usually a blockchain. 33 These are sometimes categorized as “payment tokens”. Indeed originally, these tokens were intended for payment purposes 34 but, because unbacked cryptocurrencies don’t behave as money or currency (see above) except in their own ecosystems, they essentially become speculative assets driven by supply and demand. 35 This has led some to recommend regulating the crypto space in a manner similar to gambling. 36

● Asset-backed tokens represent the opposite case and include two main subclasses:

○ Stablecoins, sometimes called asset-referencing tokens (ARTs) when applied to multiple assets are pegged to fiat currencies (usually USD) by either holding assets – combinations of fiat money, securities, and other cryptocurrencies – or through algorithmic stabilization measures that balance supply and demand by buying and selling other cryptocurrencies. Backing with fiat-based currencies and securities requires careful auditing and evaluation to confirm adequate collateral. 37 Algorithmic stabilization works…except when it doesn’t. 38 The stablecoin’s purported raison d’etre is to
maintain stable value while harnessing the benefits of distributed ledgers, but critics contend that stablecoins are increasingly becoming an unstable source of liquidity for decentralized trading and lending. 39

○ Security tokens are “tokenized”, or “dematerialized” versions of real-world assets such as stocks. They may either be issued natively and exist only on a blockchain or alternatively, their real-world doppelganger must be held in custody while the proxy token exists. New ideas such as the Regulated Liability Network (RLN) 40 and the BIS’ nascent “unified programmable ledger” 41 build on this
concept to represent balance-sheet liabilities – like bank deposits and trade invoices – on a blockchain. Non-fungible tokens (NFTs) point to non-financial digital assets such as artwork, and unlike other “fungible” tokens such as Bitcoin, are not interchangeable. 42

● Utility tokens: allow access to a service and often double as a means of settlement within an ecosystem. The Ripple XRP token is an example of a utility coin used for interbank settlement across borders. Ether facilitates the completion of smart contracts and pays “gas” charges for processing on Ethereum blockchains while also remaining an unbacked digital currency that can be bought and sold on exchanges. Governance tokens, initial coin offerings (ICOs) etc also authorize the bearer or give rights over activities such as blockchain governance.

There are many theoretical advantages to keeping track of things on a distributed ledger technology (DLT), like a blockchain. They include 24/7 always-on functionality, instant “atomic” (all or nothing) settlement, “composable” programmability, 43 arbitrary granularity (can be almost endlessly subdivided), and operational resilience across many distributed nodes. These benefits can even be extended across disparate ledgers through technologies like hashed timelock contracts (HTLCs). 44 The regulatory task is to harness the benefits associated with DLT for each type of token while curtailing the attendant financial and social risk.