Network Tokens vs. Company-Backed Tokens: A Defining Distinction in Digital Assets

Introduction: The Critical Divide in Digital Assets

The rapid expansion of digital assets has created new opportunities—and new regulatory challenges—for businesses, investors, and developers in Web3. At the core of this evolving landscape is a fundamental distinction: network tokens vs. company-backed tokens.

Understanding this difference is not just theoretical—it determines how tokens are classified, how they function in the market, and how they are regulated. For organizations integrating digital assets into their business models, this classification impacts investment risk, compliance requirements, and long-term sustainability.

At a high level, the key question is: Is the token tied to a decentralized network, or is it controlled by a single company? The answer shapes everything from economic value accrual to legal obligations—which is why businesses must carefully assess the nature of the tokens they issue, invest in, or integrate into their platforms.

To fully grasp this, we must first explore how network tokens and company-backed tokens operate within digital ecosystems.

The Core Difference: Open vs. Closed Systems

At the heart of the distinction between network tokens and company-backed tokens is the difference between open, decentralized systems and closed, centrally controlled systems.

Network Tokens: Decentralized and Permissionless

Network tokens operate within open, permissionless ecosystems where no single entity controls their issuance, distribution, or value accrual. Instead, these tokens function as part of a decentralized protocol, sustained by on-chain mechanisms rather than corporate governance.

Because of this autonomous structure, network tokens often resemble commodities in regulatory frameworks rather than securities.

Key Characteristics of Network Tokens:

1. Exist within decentralized protocols, independent of a central authority.
   
   

2. Value accrues through network usage, staking, or smart contract incentives.
   
   

3. Often classified as commodities, reducing regulatory risk.

A prime example of a network token is Ethereum (ETH), which derives its value from the Ethereum blockchain itself rather than from a single organization.

However, not all tokens fit this decentralized model. Many tokens today do not operate independently of a controlling entity, placing them in the category of company-backed tokens.

Company-Backed Tokens: Centralized and Dependent

Unlike network tokens, company-backed tokens are issued and controlled by a single company or organization. Their value is directly tied to the business model, financial health, and governance decisions of the issuing entity.

Because these tokens rely on a central entity for their economic sustainability, they often face higher regulatory scrutiny and are more likely to be classified as securities.

Key Characteristics of Company-Backed Tokens:

1. Controlled by a specific company or organization.
   
   

2. Value depends on company performance, operations, and governance.
   
   

3. More susceptible to supply manipulation and regulatory enforcement.
   

A well-known example is FTX’s FTT token, which collapsed alongside the company because its value was directly tied to FTX’s financial decisions.

The distinction between these two types of tokens has far-reaching implications—especially when it comes to their economic models and regulatory classification.

Economic and Regulatory Implications

Network Tokens: The Case for Commodities

Because network tokens function within decentralized ecosystems and lack a single issuing entity, they are often compared to commodities like gold or oil. Their value is derived from network demand and on-chain activity, rather than from a company’s financial performance.

Key Regulatory Considerations for Network Tokens:

1. Decentralized value accrual – No central party controls token issuance or pricing.
   
   

2. Protocol-driven incentives – Rewards and staking mechanisms are built into the network itself.
   
   

3. Lower regulatory risk – The SEC has suggested that Ethereum (ETH), in its current state, is not a security.

While network tokens may avoid securities classification, company-backed tokens operate under different economic principles—making them more likely to fall under securities regulations.

Company-Backed Tokens: Securities-Like Risks

When a token is backed by a company, its value is no longer autonomously determined by an open network. Instead, the token’s performance is linked to corporate operations, governance decisions, and financial sustainability.

Because investors often expect profits based on the company’s efforts, these tokens frequently meet the legal definition of securities—placing them under the jurisdiction of financial regulators.

Key Risks of Company-Backed Tokens:

1. Issuers can manipulate supply, pricing, or redemption models.
   
   

2. If the issuing company fails, the token becomes worthless.
   
   

3. Regulatory scrutiny is significantly higher, increasing compliance obligations.
   

A direct example is FTT, which lost nearly all its value when FTX collapsed, exposing the risks of centralized control.

Given these economic and regulatory differences, businesses must have a clear framework for classifying the tokens they issue, integrate, or invest in.

Why Token Type Matters for Businesses

Depending on what you want to achieve — whether you are trying to settle transactions (e.g., within a closed DLT network between banks in Singapore or the Philippines), build a new product, or invest in digital assets — the type of token you choose has material consequences.

Example:
If you want to do settlement between banks, a company-backed token may be better. It offers:

• Centralized governance,
  
  

• Built-in compliance mechanisms,
  
  

• Predictable issuance and redemption policies aligned with financial regulations.

Alternatively, if you aim to build an open, decentralized ecosystem where users interact freely without centralized control, a network token would be more appropriate. However, expect more complexity in governance and regulatory uncertainty.

Thus, the choice of token model isn’t just technical — it’s strategic.

A Practical Framework for Token Type Selection: What Business Owners Need to Know

As a business owner evaluating token models for your platform, understanding the right type of token to use is essential for long-term success. Whether you're issuing, integrating, or investing in digital assets, the type of token you choose will affect everything from regulatory compliance to market dynamics. Here's a simple framework to help you decide:

1. Do you prefer an open and permissionless network?
   If you want your token to exist within a decentralized and open system, where no single entity controls the ecosystem, then a network token may be the right choice. This is ideal if you’re aiming for a permissionless environment where anyone can participate and benefit from the network. If you prefer more control and a closed environment, a company-backed token might be more fitting.
   
   

2. Do you want the value to accrue to token holders and the protocol, rather than just to your company?
   Network tokens tend to derive their value from the activities within the ecosystem—think staking, liquidity, or transaction fees—benefiting the protocol and its users. If you want the value of the token to be intrinsically tied to your company’s success, such as through business model control, then a company-backed token would be more appropriate.
   
   

3. Do you want the system to operate independently of your company?
   Network tokens are designed to be self-sustaining, meaning that they can continue to function and grow even if the original developers step away. If you envision a system that runs autonomously and doesn’t rely on your company’s ongoing involvement, then a network token fits your needs. On the other hand, if you prefer a token that is tied directly to your company’s governance and business operations, you may lean toward a company-backed token.

If your answers to these questions are YES across the board, a network token is likely the best fit. 

If not, and you need more control or direct ties to your company’s performance, a company-backed token might be better, though it will come with more regulatory oversight.

To better understand this, let’s apply the framework to real-world examples.

Real-World Applications: Classifying Tokens by Model

1. Decentralized Exchanges (DEXs) as Network Tokens

DEX governance tokens, such as Uniswap’s UNI, function as network tokens because:

• Liquidity is controlled by protocol governance, not a centralized entity.
  
  

• Developers can build on the network without company oversight.
  
  

• Value accrues through on-chain mechanisms like trading fees.
  

2. Web3 Gaming: Network vs. Company-Backed Tokens

• Network Tokens – Fully on-chain gaming assets that remain operational even if developers exit the project.
  
  

• Company-Backed Tokens – Tokens tied to a centralized studio's business model, where the issuing company controls economic policies.
  

3. Decentralized Social Networks

Protocols like Lens and Farcaster classify as network tokens because:

• User identities and interactions are stored on-chain.
  
  

• The network remains open-source and permissionless.
  
  

• No single entity has control over governance.

4. Closed DLT Networks for Financial Institutions

If you’re considering a settlement system within a closed DLT (Distributed Ledger Technology) network—such as a network for all banks in Singapore or the Philippines—there are important factors to consider when choosing between network tokens and company-backed tokens:

Network Tokens: These might be used in a permissioned blockchain setup where the tokens act as governance instruments or facilitate value exchange without the reliance on a central authority. This is ideal for decentralized, interoperable systems that prioritize transparency and reduced reliance on intermediaries.

Company-Backed Tokens: These tokens, controlled by a central entity (like a bank or consortium of banks), could be used for more controlled, permissioned environments where governance and economic policies are managed by a central body. This model would be better for institutions looking to maintain stricter regulatory compliance and operational control.

For businesses, the decision between using network or company-backed tokens depends on your operational goals:

Governance: Do you need decentralized decision-making, or should a single entity manage the process?

Value Accrual: Do you want the token’s value to derive from network participation, or should it be tied to the business performance of the issuing entity?

Regulatory Considerations: Consider the regulatory landscape of your region. If you're operating in a jurisdiction with stringent financial regulations, company-backed tokens may be subject to higher scrutiny.

These examples highlight why classification matters for both businesses and investors. Choosing the right model for your platform, whether it’s a decentralized exchange, gaming network, or financial settlement system, directly impacts regulatory obligations, governance, and the long-term viability of your ecosystem.

These examples highlight why classification matters for businesses and investors—because it directly impacts regulatory obligations and investment risk.

Final Thoughts: Navigating the Future of Tokenized Assets

For businesses integrating blockchain technology, token classification is not just an academic exercise—it has real legal, financial, and strategic consequences. As regulatory frameworks evolve, companies must take a proactive approach to ensure that their token models are:

1. Compliant with securities laws
   
   

2. Designed for long-term sustainability
   
   

3. Aligned with decentralized principles where applicable
   

How is your business approaching tokenized assets?

1. Need expert guidance on regulatory classification?
   
   

2. Evaluating network vs. company-backed token models?
   
   

3. Looking to integrate compliant tokenized assets into your platform?
   

Speak with our team to develop a compliant, scalable token strategy tailored to your business needs.  Schedule a consultation today!