Changes to the Ethbet token model
Some changes have been made to the Ethbet token. This document is an overview of the changes as well as the reasoning behind them. These changes have needed to happen for awhile now and have been difficult to make, but they absolutely must be made and communicated prior to the Ethbet crowdsale.
The functionality of the Ethbet token will no longer include receiving dividends as profit. Instead, the token will be used as credit for the Ethbet platform and Ethbet protocol, in a manner similar to most other tokens. Those of you that have been paying attention to regulations related to cryptocurrencies recently already know the reasons behind this change.
Why EBET cannot pay dividends
The legal landscape regarding tokens that pay dividends has gotten notably worse over the past few months. For an introduction to the concept, a token that pays dividends is likely considered a security by the Howey Test. Once a token is considered a security, it gets significantly harder to do, well, anything with it. From the SEC’s website:
If the virtual token or coin is a security, federal and state securities laws require investment professionals and their firms who offer, transact in, or advise on investments to be licensed or registered.
Not only is selling a token that is a security difficult, but it can make becoming listed on many exchanges impossible, as exchanges are not registered to sell securities either.
That quote is specifically from the United State’s SEC, but other countries are quickly following suite. Singapore also announced they would regulate offerings deemed to be securities. The Canadian financial regulator believes Many ICOs Should Be Subject to Securities Laws.
These countries are the early movers. Beyond the laws of the United States, a token that is considered a security by regulators may be subject to securities laws in every other country it is sold in. Apart from regulations from the SEC, individual US states may have their own regulations and requirements for securities, called Blue Sky Laws. Although this post is primarily focusing on the status of tokens as a security, the trend of regulations in the space of cryptocurrencies is obvious: more are coming. A lot more.
Some recent ICOs have tried to avoid the jurisdiction of the SEC by implementing Procedures Reasonably Designed to Avoid Targeting the United States. This is commonly seen when websites refuse to sell to and block US residents. Although this tactic may appear to be working out for some tokens, it is clearly not sustainable.
Back to Ethbet
Having the Ethbet token be considered a security might help the crowdsale to succeed, but somewhere down the line, it will cause significant issues. The time to fix this is not after token holders have already purchased these tokens, that is clearly unfair. We’re interested in the long-term success of Ethbet as a platform and protocol. For this reason, it is critical that the dividends aspect of the Ethbet token be completely removed. This significantly improves the long-term path forward for this project, as we will be able to spend our time developing instead of worrying about the 100 regulatory bodies that want to make our token illegal to sell or transact with due to its status as a security in their eyes.
This change to the token does not change the scenario back into a free-for-all, but it does significantly improves the landscape and future prospects of Ethbet. Although there are a lot of other laws that can be considered by ICOs, at no point in the process will the token’s status as a security make anyone’s life easier.
Changes to the token
The primary change made to the Ethbet token is to adopt a model that is being successfully used by many other projects. The Ethbet token will be a unit of currency that can be used to pay fees related to the Ethbet platform/protocol. There’s a lot of interesting ways we can tie the Ethbet token into Ethbet such that as our project gains more users, the value of the token should appreciate.
This change may be unappealing to some investors, but it is crucial to the long-term success of this project. Although a token that is used for fees/credit may sound less appealing or lucrative than a token that pays dividends, there are some factors to keep in mind:
- Tokens that pay dividends still appreciate in value primarily due to speculation. One of the only projects that has paid out dividends, Etheroll, has a market cap of over $25M million, but produced only $300K of dividends in its first payout period, 7 months after the token was created. This isn’t intended to undermine their success, but rather demonstrate that the value of a token is driven more by speculation than by realized dividends.
- It is technically complex to pay out dividends. Token holders must have their own private keys during the dividend period, and must execute the dividend smart contract during this period in order to receive anything. It’s much more favorable to have the value of a token be derived from its usage rather than potential dividends.
- Many projects that use the token-as-credit model still experience large market cap growth and demand for their token. Some examples of this include 0x, Funfair, and Edgeless, but there are likely hundreds of others.
- As the above sections mention, having a token that pays out dividends is not sustainable and is technically illegal in many countries in many different ways, even if no one has been prosecuted for it yet
We are investigating clever token-usage mechanisms that encourage the value of the token to appreciate. Even without these mechanics, credit-based tokens have historically performed comparable to dividend-based tokens. For example, instead of Ethbet’s profits being distributed to token holders as a dividend, we can have a buy-back feature, consisting of an Ethbet smart contract that offers to buy EBET at a high price with any profits in ETH that it has acquired. It may also be possible for token holders to vote on a burn rate of this EBET, causing the token supply to become deflationary.
The website and whitepaper have been updated to reflect these changes. We’re currently still optimistic about the crowdsale even after these changes, and have seen a significant amount of interest result in some of the advertising that is just now starting to kick in. We hope that as a result of these changes this project will be able to succeed not only in its crowdsale, but for the months and years that follow it.