Could someone explain to me how the system of counterparty and coloured coins are different? From my limited understanding of both they seem pretty similar.
From what I can tell, they're similar from an asset issuance/transfer perspective but differ when it comes to exchange.
In particular, it seems that counterparty (and mastercoin) support issuance/tracking of tokens issued by third parties ("colored coins" if you like) but also have a concept of decentralised exchange... i.e. bids and offers are also processed (and persisted) in the platform.
This has many downsides (blockchain bloat, etc) but does open the possibility that offers to buy/sell can be executed with certainty... valid, matching orders result, inevitably, in an exchange of the assets.
Contrast with colored coins, where buy/sell orders are processed external to the platform - and so there is the risk that one or other party could renege.
I don't have a strong view on which I approach I prefer but they *are* different.
I wrote about it here:
http://gendal.wordpress.com/2014/06/10/a-decentralized-securities-trading-and-settlement-system-is-being-built-hidden-in-plain-sight/