The amount of money raised through initial coin offerings, or ICOs,
has attracted attention from investors, venture capitalists, and
government agencies. Understanding the potential, risks, and long-term
implications of these tokenized instruments is tricky, given that
there are three main types of tokens in play.
3 role types of ICO tokens
Here’s what we know for now when assessing whether virtual
currencies—such as blockchain tokens or coins—should be classified as
a commodity, a security, or simply as a token.
A security: In July, the U.S. Securities and Exchange Commission
indicated that federal securities laws can apply to the activity
of virtual organizations that use blockchain technology or
distributed ledgers to offer or sell coins to the public to raise
capital, depending on the circumstances. If the virtual coins are
securities, such organizations must register the offer and sale of
tokens unless valid exemptions apply. In addition, platforms that
trade the tokens in the secondary market would be considered as
“exchanges” under federal law. They must register as national
securities exchanges or operate under an exemption. The SEC further
underscored in its July report that those operating such
exchanges and hold interests in other projects that are securities
should consider the requirements of the Investment Company Act.
Since then, the SEC established an enforcement division and has
charged at least two companies running initial coin offerings with
fraud and the selling of unregistered securities.
A commodity: Like gold or silver, virtual currency
can be a commodity that someone trades with the expectation that it
will deliver a profit. As early as 2015, the U.S. Commodities
Futures Trading Commission determined that virtual currencies, such as
bitcoin, can also be deemed commodities in the context of derivative
contracts involving virtual currencies. Moreover, the commission
released a primer on virtual currencies. It covers the
basics about virtual currencies and the CFTC's role in regulating
A token: Some ICO tokens constitute units of
service that a decentralized organization or network can render.
These tokens can be compared to an application programming interface
key, or API key (a software intermediary that allows two
applications to talk to each other). And as such, these tokens do
not qualify as securities or commodities. These utility tokens can
be purchased and traded. But how can you tell if a token is a
utility token that’s a unit of service, or a security token that
triggers the application of securities laws? This could be
especially difficult if the token is sold before the platform is
fully operational. To help navigate these perilous pathways,
Protocol Labs, Cooley, AngelList, and CoinList collaborated to
create a compliant framework for token sales. They propose a
so-called “simple agreement for future tokens,” or SAFTs, that allow
ICO token sales to comply with U.S. securities laws. SAFTs are
essentially investment contracts aimed at projects that want to
raise money for non-security tokens. The SAFT framework is designed
to ensure that tokens created are less likely to be a security.
However, there’s no guarantee that the SEC or the courts would see
it that way.
The impact of agency efforts
The cautious pronouncements and actions from government agencies
may not eliminate all regulatory uncertainty, but they could help
clear out the rabble. Plus, they will foster a healthier and safer
marketplace for decentralized networks and organizations.
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