The word "cryptocurrency" is a bit of a misnomer in some cases. Many cryptocurrencies actually look more like rewards such as air miles or commodities like oil. The focus of this article is to compare a particular class of cryptocurrency to stocks. Exchange tokens are created and issued by centralized cryptocurrency exchanges such as Binance, Crypto.com, and FTX. Each one of them has created its own token: Binance Coin (BNB -0.23%), Cronos (CRO -5.20%), and FTX Token (FTT), respectively. I make the case that these tokens look more like the stocks of the company rather than cryptocurrencies.
Anatomy of an exchange token
Binance arguably pioneered the blueprint for exchange tokens. It created Binance Coin in 2017 and sold it to investors to fund the development of its platform. In the beginning, the incentive to buy and hold Binance Coin was to get trading fee discounts on Binance. While this incentive still exists, Binance Coin has grown to have dozens of use cases. One use case is to stake Binance Coin in the network that now runs the token: Binance Chain. Since Binance Chain is a proof-of-stake (PoS) blockchain, users who stake their tokens are entitled to rewards paid out in Binance Coin. While this reward is not explicitly a dividend, it sure looks like one.
Cryptocurrency Exchange Tokens
Staking rewards
Other exchange tokens have some sort of staking and reward mechanism built into them. In each case, staking rewards makes the token look like a stock because of the resemblance to a dividend-producing asset. While this is appealing for investors, it also causes regulators to look at the asset as a security. This can trigger regulatory bodies such as the Securities and Exchange Commission (SEC) to scrutinize and even penalize the issuing party.
Progressive decentralization
Since exchange tokens look like stocks and act like stocks, the exchange that initially created them spends a lot of money and effort to decentralize the issuing of new tokens. Binance created Binance Chain, Crypto.com created Crypto.org and Cronos, and FTX has yet to create its own blockchain. The idea is that by publishing open-source code and letting other people run and maintain it, they are removing themselves as the issuing entity of the token. This avoids being able to be held legally accountable for the direction of the token.
Incentives
Distancing themselves from the creation of the token doesn't stop the exchanges from creating incentives around the token. These exchanges place their token at the center of their platform and hold a large amount of the token. So they have plenty of incentive to create more uses and utility for the token so that their own bags are full and their user base is happy. Each exchange has created its own set of programs and promotions for which their token is used.
For example, Crypto.com has the Supercharger platform, wherein users can deposit Cronos tokens in order to get the currently promoted token. Binance has a quarterly burn program wherein fees paid in BNB are collected from the exchange and destroyed, permanently reducing the supply of Binance Coin. FTX users get airdropped tokens for staking FTX Token, passively increasing the diversity of the users' cryptocurrency portfolios.
Exchange ecosystems
Despite my major position in Bitcoin (CRYPTO: BTC), I really like exchange tokens. I have a good idea of what they are and how to value them. Valuing other cryptocurrencies is difficult because they're part of a nascent asset class. Exchange tokens offer investors aspects of familiarity from the paradigm of equity investing. The companies behind them have a balance sheet, employees, debts, and a user base. Each of these factors can go into an equation that helps me determine a rough valuation for the token. Of course, there is the fact that these tokens are at the center of their own blockchain decentralized finance (DeFi) ecosystems. The familiarity of a stock and the novelty of a cryptocurrency are what have made me invest in exchange tokens.
