Understanding Crypto Tokens: Types, Regulations, and Key Considerations

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Crypto tokens have become a foundational element of the digital asset ecosystem, enabling new forms of value transfer, ownership, and financial innovation. Built on distributed ledger technology (DLT), these tokens represent digital value with diverse functions—from currency and investment to utility and authenticity verification. As the regulatory landscape evolves, particularly in Europe, understanding the different types of crypto tokens and their legal implications is essential for investors, developers, and institutions.

This guide breaks down the major categories of crypto tokens, explores key regulatory frameworks such as Germany’s Banking Act (KWG) and the upcoming EU Markets in Crypto-Assets Regulation (MiCA), and clarifies compliance requirements for issuance and trading.

What Are Crypto Tokens?

At their core, crypto tokens are digital representations of value created and managed on an existing blockchain infrastructure—most commonly through smart contracts on platforms like Ethereum. Unlike native cryptocurrencies such as Bitcoin or Ether, which are intrinsic to their respective blockchains, tokens are issued on top of established networks.

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Crypto tokens can symbolize various forms of value—monetary, asset-backed, functional, or ownership rights—and their classification determines how they are treated under financial regulations.

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Major Types of Crypto Tokens

Payment Tokens (Virtual Currencies)

Payment tokens, often referred to as virtual currencies, serve primarily as a private means of exchange. They are not issued by central banks and include well-known examples like Bitcoin (BTC) and Ether (ETH). These tokens typically lack intrinsic value or backing by real-world assets.

They fall into two subcategories:

While convenient for peer-to-peer transactions, payment tokens are highly volatile and generally lack consumer protections.

Asset-Referenced Tokens (ARTs) – The Future of Stablecoins

Under the proposed EU MiCA regulation, asset-referenced tokens (ARTs) are defined as crypto assets whose value is linked to a basket of assets—including fiat currencies, commodities, or other crypto assets. This category encompasses most stablecoins.

Unlike traditional securities, ARTs do not necessarily confer ownership rights over the underlying assets. Instead, stability is maintained through mechanisms such as:

Despite their design for stability, ARTs are still subject to market risks and have experienced significant de-pegging events in the past.

Outlook: European Regulation (MiCA)
The EU's Markets in Crypto-Assets Regulation (MiCA) introduces a clear framework for ARTs and electronic money tokens (EMTs). Once enacted, MiCA will impose strict transparency, reserve management, and governance requirements on issuers—aiming to protect users and ensure market integrity.

Utility Tokens: Access Over Investment

Utility tokens grant holders access to a product or service within a specific platform or ecosystem. For example, a token might allow users to pay for cloud storage, participate in governance votes, or unlock premium features in a decentralized application (dApp).

While initially designed for functional use, some utility tokens gain speculative value and begin trading like financial instruments. This dual nature can trigger regulatory scrutiny—especially if the token is marketed as an investment opportunity.

Hybrid models—where utility tokens are also used for payments or profit-sharing—are increasingly common and may be reclassified as crypto assets or security tokens depending on their economic substance.

👉 See how utility tokens are reshaping digital service access models.

Non-Fungible Tokens (NFTs): Digital Authenticity and Ownership

NFTs are unique cryptographic tokens that represent ownership of a specific digital or physical asset—such as artwork, music, real estate, or collectibles. Each NFT has a distinct identifier (token ID), making it non-interchangeable with others.

Although often associated with digital art, NFTs have broader applications:

It’s important to note that technical uniqueness does not always imply content uniqueness. Multiple NFTs can carry identical rights or metadata. Regulatory treatment of NFTs follows existing principles for crypto assets—meaning they may be subject to financial supervision if they exhibit investment-like characteristics.

Security Tokens: Digitized Financial Instruments

Security tokens mirror traditional financial instruments such as stocks, bonds, or fund shares. They represent contractual claims or membership rights—like dividends, profit participation, or voting power—and are legally equivalent to securities under EU and German law.

Because of this equivalence ("substance over form"), security tokens must comply with:

Issuers must often publish detailed disclosures and obtain regulatory approval before offering these tokens to the public.

Electronic and Crypto Securities: Bridging Traditional Finance with Blockchain

Germany’s Electronic Securities Act (eWpG) allows securities to be issued electronically without paper certificates. Two key subsets include:

Crypto Securities

When electronic securities are registered on a DLT-based system (a “crypto securities register”), they become crypto securities. These are legally recognized as financial instruments and require specific authorizations for:

Such frameworks aim to integrate blockchain innovation while maintaining investor safeguards.

Crypto Fund Units

Similarly, investment fund units can now be issued as crypto fund units under the KryptoFAV regulation. These units must comply with:

Regulatory Classification of Crypto Assets

Under German law, crypto assets are defined in Section 1(11) of the KWG (Banking Act) as:

A digital representation of value that is not issued by a central authority, lacks legal tender status, but is accepted as a means of exchange or used for investment purposes—and can be transferred, stored, and traded electronically.

This broad definition includes:

However, it excludes:

Importantly, a token can be both a crypto asset and another type of financial instrument—such as a security—depending on its design.

Prospectus and Authorization Requirements

When Is a Prospectus Required?

If crypto tokens qualify as securities or non-securities investment products, a prospectus must be published before public offerings. This applies under:

An offer is considered “to the public” if it’s accessible to investors in Germany—even if marketed globally online.

Key Authorization Requirements

Various activities related to crypto tokens may require prior approval from BaFin:

Additionally:

...require separate licensing under KWG.

Frequently Asked Questions (FAQ)

What is MiCA and how will it affect crypto tokens?

MiCA (Markets in Crypto-Assets Regulation) is the EU’s comprehensive regulatory framework for crypto assets. It will standardize rules across member states for:

Once implemented, MiCA will reduce fragmentation and enhance legal certainty—but won’t override existing rules for security tokens already covered by MiFID II.

Are NFTs regulated?

Yes. While NFTs themselves aren’t automatically regulated, their use case determines oversight. If an NFT functions as an investment product or conveys financial rights, it may fall under securities or financial instrument regulations.

What is a hybrid token?

A hybrid token combines features—such as utility access plus profit-sharing or payment functionality. Regulators assess these based on economic reality rather than labels. Even if called a “utility token,” it may be classified as a security or crypto asset if it serves investment purposes.

What is an ICO/STO?

An Initial Coin Offering (ICO) or Security Token Offering (STO) raises capital by issuing digital tokens. STOs involve regulated security tokens; ICOs often involve utility or payment tokens. Unlike regulated prospectuses, ICO white papers aren’t legally binding—posing higher risks for investors.

Can insurers invest in crypto assets?

Under Solvency II rules, insurers may invest in crypto assets under the “prudent person” principle—but only if risks like volatility and custody are properly managed. However, crypto assets cannot currently be included in statutory guarantee assets due to quality and liquidity concerns.

Are Bitcoin ETFs allowed in Europe?

No. Exchange-traded funds (ETFs) tracking a single crypto asset like Bitcoin are not permitted under EU UCITS rules because they violate the principle of risk diversification. European investors can only gain indirect exposure via derivative instruments like delta-one certificates.

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By understanding the distinctions between token types and navigating evolving regulatory landscapes, stakeholders can harness blockchain innovation responsibly and sustainably. Whether you're building, investing, or regulating, clarity on crypto token classification is more critical than ever.