Utility Tokens & The Cooperative Act
The cooperative organization is, by design, a decentralized corporate structure. If you are like most people, when you hear the word ‘coop’ you may think non-profit or a small time organization. These misconceptions couldn’t be farther from the truth.
While a corporation is typically beholden to customers and investors, the coop blurs these lines into a single classification — members. Often, this can create an organization with a stronger alignment around their mission. However, cooperatives are often known to suffer from issues of governance, managing decentralized decision making, and executing administrative tasks — pretty much everything that smart contracts, and platforms such as Ethereum, enable to be automated.
Not convinced? If you have never been a member of a coop, here are some of the Coles notes.
- Coops typically require you to buy a membership prior to participating in, accessing, or benefiting from the goods and services offered by the ‘network’.
- Coops receive special tax treatment, as do their members, if the returns are sent to members as “rebates” rather than interest, dividends, or capital gains.
- In the USA, the Securities Act of 1933, as amended, carves out specific exemptions for cooperatives to ease the burden on this community driven organization model.
Sound familiar yet?
The initial coin offering (ICO), specifically in the case of utility tokens, creates an interesting opportunity for cooperatives. Consider these two scenarios:
Scenario 1 — The Banking ICO — ‘BankCoin’
A small group of developers come together, driven to decentralize and disintermediate the banking section using blockchain. To raise funds and build a network they write the stereotypical white paper, copy some OpenZeppelin code from Github, and throw up a bootstrap website. They have no product but opt to sell a ‘utility token’ to investors in hopes of avoiding securities regulation. After a few months of promoting their offering — saturating Facebook with ads, paying for ‘feature articles’ on Cointelegraph, and paying for community endorsements on Reddit — so they close a cool $153M USD.
For anyone with experience in financial regulation or securities law it is hard to imagine how BankCoin would not be considered a security. In truth, many ICOs with similar offerings — including Tezos, Bancor, Paragon, and Kin — are now being investigated for potential class action lawsuit opportunities filed by investors for issuing a security without filing the required paperwork…not a good way to get off the ground in an industry struggling with distrust and finance scams.
Scenario 2 — The Finance Coop ICO — ‘FairCoin’
Again, a small group of people come together with a mandate to make a positive impact on the world — and make money doing it. This time, they incorporate as a cooperative. Rather than deal with the headaches of managing cooperative membership in spreadsheets, or even worse…on paper…they decide to leverage the power of decentralized technology to automate the governance and administration of their membership with — you guessed it — a token.
Coop legislation is standardized internationally so the team opens their membership to the entire world. Faircoin chooses to issue multiple types of membership — investors, employees, partners, and volunteers — each with their own incentives and economics.
While only a few years ago this incorporated cooperative structure would have seemed insane, that is no longer the case. Faircoin, in structure and in their value proposition, sounds like many of today’s ICOs…with a few limitations making mass speculation and the ever increasing ICO ‘pump and dumps’ difficult.
As the world continues it’s breakneck pace of adopting decentralized systems, the decentralized nature of cooperatives and credit unions creates new and exciting paradigms of collaborative wealth creation and distribution.
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