Category: Securities

Posted on

Should you go for utility or security token for your ICO project?

Categories Blockchain, Cryptocurrency, ICOs, Tokens, Utility Tokens, Security Tokens, Securities

Should you go for utility or security token for your ICO project?

In 2017, the traditional method of startup fundraising (using VC methodology) was completely revolutionized. A boom in the launching of ICOs saw literally hundreds of companies turning their attention to the blockchain and creating a digital currency born in the form of an invest-able token. This manner of crowdfunding which has seen unprecedented levels of increased popularity has found its wings clipped by regulators and authorities who have picked up on a few worrying issues. Authorities such as the SEC have taken an in-depth look at the tokens being produced by ICOs and have decided that the majority of them could be classified as a security.

This classification does not, however, apply to all tokens and some that are being developed off the blockchain can be considered as utility tokens.

There are, of course, more than two types of token such as equity, work, share-like, and asset-backed but it is important to focus on the two types – the utility and the security. By understanding the difference between these two types of token each ICO can choose a more suitable regulatory pathway.

Securities token

By the end of July 2017, the SEC dealt a big blow to the ICO world by declaring that DAO (Decentralized Autonomous Organization) tokens were securities and were therefore subject to federal securities laws. It was never the intention of token creators for them to be considered as securities but as the companies that issue these tokens, often increase in value over time, the token begins to perform as a security.

The Chairman of SEC, Jay Clayton added that “Prospective purchasers are being sold on the potential for tokens to increase in value, with the ability to lock in those increases by reselling the tokens on a secondary market or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.”

But to decide whether a token should be classed as a security, one can put it through the Howey Test. The test seeks to find if a token has the following attributes; does it offer the chance to invest money and then to share in the profits of an enterprise managed and partly owned by respondents, and does the scheme involve investing money in a common enterprise with profits that come only from the efforts of others. As most ICO tokens fall into these categories, as such they fall under the jurisdiction of the US federal law.

Utility Tokens

The other popular type of token is a utility token and it serves a role where security tokens are resulting from the company receiving unwanted attention from securities regulators. In short, a utility token can be defined as representing future access to a company’s product or service. The defining feature of a utility token is that it is not designed as an investment, but rather as an IOU (I owe you) of sorts for future use. If utility tokens are structured properly, this means that they cannot be considered as a security token and therefore cannot be governed by federal laws.

There are already some very successful utility tokens on the market such as the ones issued through Civic. Civic has created 1 billion utility tokens that offer access to identity verification services in a decentralized and token-based system. These tokens each represent a unit of account for the Civic network and the more the network grows, the more utility the token is worth.

Out of 226 ICOs, only 20 of the tokens issued are actually used for the running of the applicable networks and are therefore utility tokens. Another example of a company that uses utility tokens is Storj. These tokens allow the holder to use space on their network and the token crowd-sale  raised over half a million dollars in 2015.

Shawn Wilkinson explains:

“For many companies, utility appears to be an afterthought, but for a token to be successfully adopted into the community, it is the most critical component. With the amount of tokens on the market today, and new ones being launched every day, it’s clear there is a bubble, though the size of it might be debatable. When the market slows, the tokens that have no utility will ultimately not have any value at all.”

Another way of explaining how a utility token works is by describing it as a coupon for the company and the services that it provides. For example, a retailer accepting pre-orders of a video game that has not yet been released. This kind of token differs from the usual ICO token that most people are used to and whilst it cannot be applied to every company, it is perfect for some. There have already been instances where utility tokens have replaced the role of a security token and have therefore allowed the blockchain solution to fulfill its primary goal – an example being Filecoin which raised an impressive $52 million.

Utility over Security

Whilst on paper, choosing a utility token over a security token might seem easy enough, there is more to it than that. If a company is unable to find a place in any categorization for their token, then it will become a securities token but if the token can be placed in them, it makes sense no avoid it being a security and having to negate a regulatory minefield. The first step is to decide whether it is fungible or non-fungible.

Utility fungible and non-fungible tokens

These are tokens that can be interchanged for another token. The fact that it is fungible means that the goods, service, token, or asset is interchanged with another that has an equal value. Gold is often considered as an example of a fungible asset as one ounce of gold, whether in coin, ingots, or dust form is still worth the same amount of money.

A voter token is another example of a situation where both blockchain and tokens can be utilized without the need for a native security-style token. These governance tokens allow those that are using the network to vote and a utility token is sufficient for this purpose. Similarly, membership tokens are also considered to be fungible utility tokens due to the fact that the token is only being used to access the platform and utilize the services.

A non-fungible token is one that is used to determine the ownership of a token or digital asset, such as CryptoKitties. A number of ICOs clearly fit into the above categories rather than that of a non-fungible securities token, so why have many decided on a native securities-style token which leads to regulatory pressure?

The definition and beyond

The very definition of security token and utility token were created before the advance of the blockchain era. Founder of Fusion and creator of QTUM Dejun Qian states that tokens are still a really new idea and they are something that should be defined on a case by case basis.

“The reason people try to figure out if token is a security or a utility is because people are thinking which laws the token needs to be compliant with. When people say that the token is a utility, it means that the token is designed and embedded in the Blockchain infrastructure. Naturally, it can then serve as a very important part in the Blockchain. It is very creative and can then also provide a lot of different opportunities for the Blockchain.”

According to Qian, we should move past the security vs utility point of view: “On the other side, there is the token which is regarded as a security. We have current laws covering the securities industry, and there are a lot of things we need to comply with, so people think about it in a similar way. I think we need to put more effort on the utility side, and even something else far beyond only security vs. utility. Because from my perspective, tokens are neither security or utility, it is a new thing and we cannot put a new thing in an existing framework, to determine what it is.”

Interested in ICOs Legislation in Malta? Contact us directly on +356 20103020 or by email at [email protected] to find out more.

Read More
Posted on

Why the SEC was right to reject nine BTC ETFs

Categories Blockchain, Cryptocurrency, Smart Contracts, Technology, Tokens, Wallet, Security Tokens, Ethereum, Securities

Why the SEC was right to reject nine BTC ETFs

When news broke that the US SEC had rejected a total of nine separate applications for Bitcoin Exchange-traded fund (ETFs), a key player in the industry feared the worst for not just the markets, but the future of the technology as well. But this may not actually be the bad news that everyone first thought it would be and this is why.

Whilst the cryptocurrency industry is pretty keen to launch exchange-traded funds (ETFs), regulatory bodies such as the SEC do not share their enthusiasm. For many, a crypto-ETF is seen as the next big milestone in the mainstream adoption of crypto and virtual assets.

Over the last few years, the US Securities and Exchange Commission has received a number of ETF proposals from companies and individuals such as the Winklevoss twins, none of which have passed its stringent sets of criteria. It seems that they are not convinced that the world of cryptocurrencies is ready for ETFs just yet.

Back in 2013, the Winklevoss twins were the first to file a Bitcoin-based ETF proposal and the agency mulled over its decision before rejecting the proposal around four years later. Then, in June, the twins filed another proposal which was swiftly rejected by the agency. Following the most recent round of rejections, the SEC has promised to review its decision but it seems unlikely that they are set to rule in favour of BTC ETFs any time soon.

The main reason for all of these rejections has been cited as the risk of market manipulation and the fact that the regulated market is not big enough to warrant such a decision. The issue of market manipulation remains as one of the biggest concerns in the crypto world. As a very small number of people own a very large amount of cryptocurrency (known as whales) this means that technically, prices can be artificially increased or decreased to suit the agenda of a few. The fact of the matter is that most creators of cryptocurrency retain large amounts of the coin, for example, Satoshi Nakamoto has 5.88% of all BTC, Ripple owns 60% of the XRP supply and the majority of ICO companies retain around 25% of all their tokens.

Couple this with the paranoia around regulation and lack of protection for investors and stakeholders and it is not hard to see why the SEC is wary.

The only way that cryptocurrencies are going to be able to enter such a regulated market is through widespread regulation on a global scale. Until this happens, Bitcoin and any other cryptocurrency can say goodbye to any kind of regulated ETF.

Are you looking for ICO Legal Advice? Click this link to know more.

Read More
Posted on

Indiegogo lists its very first security token 

Categories Blockchain, Cryptocurrency, ICOs, Wallet, Security Tokens, Ethereum, Securities

Indiegogo lists its very first security token

One of the world’s leading crowdfunding sites, Indiegogo has announced it is expanding its ICO listing service to include what will be the world’s first security ICO token.

The first token of this type to be made accessible through the Indiegogo platform was created by the St Regis Aspen Resort, a super-luxury resort, located in the Rocky Mountains of Colorado. The offering which has been limited to accredited investors will allow them to purchase the Aspen Coin which represents a share of the single-asset real estate investment trust that was created to hold the $18 million of stock that is made available through the site.

“Security token offerings are the investment tool of the future, a mechanism designed to store wealth by utilizing income-producing digital assets,” said Stephane de Baets, founder and president of Elevated Returns, the asset management firm that owns the resort. “By allowing access to investing in traditional assets like real estate, we are creating a new opportunity for investors to explore an ownership stake in something previously only accessible to private investors and high net worth individuals. Indiegogo is a well known and trusted name in alternative funding and cryptocurrency, making them an incredible partner for us to leverage their influence, experience and global audience.”

Investors that meet the qualifying criteria are able to contribute to the ICO via means of USD, BTC or ETH. The Aspen Token is based on the ERC-20 platform, meaning they can be held in any Ethereum wallet in the world, but due to securities regulations in the US, they can only be traded on an SEC-approved trading system. In this case, that would be Templum Markets LLC, the broker who is overseeing the ICO with Indiegogo.

Co-founder of Indiegogo, Slava Rubin said:

“We have always strived to foster innovation and provide our users access to some of the most novel and interesting products and ideas from around the world. With the blockchain revolution fully underway, we are excited about the world-changing impact and potential of security tokens. Our goal is to provide an access point to our growing network of millions of customers and the opportunity to own a fragmented interest in the St. Regis Aspen Resort.”

The Indiegogo platform was originally launched back in December 2017 with the first project listing of Fan-Controlled Football League reaching its $5 million target in a very short time. But, despite lots of interest from companies wanting to list ICOs on the platform, Indiegogo declined to list any during the first two quarters of 2018.


Are you looking for ICO Legal Advice in Malta? Click this link to know more, or send us an email on [email protected]

Read More
Posted on

SEC rejects 9 BTC – ETF applications

Categories Blockchain, Cryptocurrency, ICOs, Technology, Securities, DLT

SEC rejects 9 BTC – ETF applications

Bitcoin has been taken a hit, ever since the SEC refused applications for a total of nine different Bitcoin exchange-traded fund (ETFs).

The applications to list and trade Bitcoin ETFs were made by Proshares, Direxion and GraniteShares and were all refused by the US regulatory agency.

The decision deadlines for Proshares was August 23rd whilst GraniteShares were due to get an answer on September 15th. The industry waited with baited breath to see what decision the SEC would come to, and many expected a drastic rise in BTC value if the outcome was favourable.

In each report published by the SEC, the agency stated the following:

“The Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular, the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

The SEC also added that none of the applications provided enough evidence that the BTC futures market was of a big enough size to warrant an approval.

The SEC did state however that their disapproval doesn’t rest on whether Bitcoin or blockchain technology has potential or value as an investment or innovation, meaning that there could be hope for future applications.

The latest rejections from the SEC are nothing new for Bitcoin as in 2017, they rejected a similar application from Cameron and Tyler Winklevoss and in July they rejected a further amendment made by the two brothers.

The agency stated that their reason for rejection related to issues around investor protection because, at the time, bitcoin was subject to fraud and manipulation carried out from offshore and unregulated markets.

Now all industry eyes are on the SEC as they wait for the outcome of the CBOE Bitcoin ETF proposal although many believe that they will hold off until 2019. In the meantime, CBOE has been active in working hard with the SEC to mitigate their concerns.


If you have any questions in relation to ICOs, and Malta’s legislation regarding ICOs and blockchain please contact us on [email protected]

Read More
Posted on

Lithuania announces guidelines for cases when ICOs qualify as securities

Categories Blockchain, Cryptocurrency, Regulatory, ICOs, Tokens, Securities

Lithuania announces guidelines for cases when ICOs qualify as securities

The Lithuanian Ministry of Finance has announced the issuance of guidelines regarding initial coin offerings (ICOs) as well as outlining when cryptographic tokens could be considered as securities and how each token sale can be regulated by various laws within the country.

In a document published on Friday, a definition was outlined that would “grant profits or governance rights” to any investor that obtains the tokens via means of ICOs.

Whilst the existing civil code, in theory, should apply to all of the projects with tokens that can be used as a payment tool, a variety of financial regulations should apply if a token grants profits or governance rights.

Guidance on tokens

The ministry of finance drills down further into ICOs and provides guidance on tokens that are issued, the entity that organises the sale, and whether it participates in a secondary market exchange. It will also consider whether the ICO is a crowdfunding activity.

The framework states that these aspects should be regulated by laws that are already in place in Lithuania, such as those that govern crowdfunding, securities, and financial instruments markets. Whilst the ministry has said that the framework is not a formal bit of legislation, it does aim to use it to bring transparency to the industry so that ICOs can grow in a more regulated environment.

“ICO market has not been regulated yet. It has huge potential but there are risks that we must manage. We should make our efforts for Lithuania to become the main headquarters for those ICO project promoters who are willing to operate in a transparent and orderly legal environment”, Vilius Šapoka, Minister of Finance said in a statement.

In addition to these financial regulations, the announced guidelines will also offer forth thoughts from the country’s taxation, auditing and financial crime investigation agencies in terms of how tax and (AML) Anti Money Laundering rules should be applied. For example, the guidelines put forward a suggestion that investors’ income that is received from an individual purchase and sales of cryptocurrencies should be taxed at the standard 15% income tax rate.


Are you looking for ICO Legal Advice? Click this link to know more.

Read More