Token Sales Regulation
Anyone who has done enough reading on tokens and initial coin offerings (ICOs) knows that there exists a great deal of uncertainty in the blockchain world at large as to how the Securities and Exchange Commission (SEC) will decide to regulate tokens. Many fear that the SEC declaring tokens to be securities would put a damper on the burgeoning market. But in examining the issue, it is important to understand the differences in tokens and what they represent, and what criteria the SEC might use to determine which tokens could be considered securities, if any. This video from Peter Van Valkenburgh of Coin Center offers a concise and straightforward primer on the differing types of tokens, and how they believe the SEC might rule on each.
In looking at the issuance of tokens and their status, it is important to understand both the variety of tokens and the broad application of securities law as applied by the SEC as it might be applied to these tokens. A handy rubric offered in the guide as to what might be considered a security is asking these two questions: is the token being sold as an investment, and is there a person upon whom investors are relying for the value of the investment? If you can answer yes to both, then broadly speaking you can be fairly sure it is a security. A clear example offered is a stock versus a commodity. While a commodity, like a precious metal, can certainly be an investment, there is no central figure or group that is relied upon for its value; instead, its value comes from being bought, sold, and traded in a marketplace of investors. With a stock, an investor is relying generally upon the leadership and vision of a CEO or executive team to make smart decisions to increase the value of the company and thereby the stock as well.
When looking at a token, you have to consider what makes that particular type desirable and what is creating its value. With a token as an investment, you are putting in a certain amount of money for a token, with the expectation or hope that you’ll end up with more money at the end as that token’s value increases and you sell it to someone else. With ICOs, that expectation is often based upon a belief in the individual or team leading the project and the eventual success of the project. Buying a token as a utility means the eventual exchange of that token for the good or service that is promised. In essence, it is the same as an everyday exchange of money for goods or services that we all take part in when we go to the store or any other business.
But can there be an overlap between the world of investment and utility? Is it possible for a token to serve as both over the course of its lifespan? We will examine the issue further in our next blog.
