TYPES OF CRYPTOCURRENCIES
Cryptocurrency or crypto assets, as referred to by the South African Revenue Service (“SARS”), is an electronic, decentralised (non-bank affiliated) currency, which can be traded or used as a medium of exchange. These assets, as well as their record of ownership, are stored in a digital blockchain ledger where transactions are protected by means of cryptographic technology.
There are already thousands of cryptocurrencies in existence. While the sheer volume of available platforms can be a bit daunting for new investors, it helps to put them into two categories, namely Coins and Tokens. Before dipping your toes into crypto asset investments, it’s important to understand the difference between these two categories.
In the crypto asset space, coins are those types of currencies that operate independently to any other platform. Coins usually have their own unique blockchain with their own set of miners to facilitate the process of recording transactions.
In 2008, Bitcoin came into existence after an entity (a person or group) named Satoshi Nakamoto published the Bitcoin white paper online. The blockchain was launched later in 2009. Since then, numerous coins with different target audiences, referred to as Altcoins, have successfully been launched. Some of these include Ethereum, Litecoin, Ripple, Monero, etc.
Tokens are seen as a digital representation of an asset or, rather, a unit of value. A token is a type of cryptocurrency that does not have its own blockchain. Instead, the project is built or developed on top of an existing blockchain. When you are looking at cryptocurrencies to invest in, you should be able to see what blockchain they have been built on.
Tokens have shown a lot of movement over the last couple of years because it is incredibly diverse. A token is relatively easy to create and the barrier to entry is low, inexpensive and not labour-intensive. As the creator of the token, you can tokenise physical assets, like a picture or a house, then put it on a blockchain, which creates a wealth of opportunities for investors. The fact that it is a way to democratise ownership of assets among investors with a low investment threshold, makes it even more attractive.
Some examples of tokens are:
Utility tokens are primarily used for products or services where there is no expectation of a profit. It is, therefore, partially unregulated. These tokens are infrequent because they often fail the Howey Test, which is a test conducted to qualify a transaction as an investment contract where investors expect to make a return or a profit.
Investors in security tokens usually expect to make a profit, which is why these tokens are subject to scrutiny and regulation by government bodies. Tokens are representative of legal ownership of an asset, which must be verifiable on the blockchain
Fungible and Non-fungible tokens (NFTs)
Where fungible tokens are tokens that can be traded or exchanged for goods or services of the same value or type, non-fungible tokens can be anything unique (cryptographic assets) that can be sold or traded to interested investors.
Taxation of crypto assets
No matter what type of cryptocurrency you invest in, it will always be subject to taxation. SARS has made it clear that crypto will be viewed as revenue and taxed according to the usual income tax rates for an individual. To avoid needlessly exposing yourself to the risk of being non-compliant, it is best to seek the advice of a tax consultancy who understands the technical aspects of crypto taxation.