Is the Utility Token a Myth?

You’ve probably noticed that ICOs have been launched all over the place since the end of 2016. Some figures say that there’s an average of over 50 companies doing an ICO every month with over $5 billion raised just in the last year. Not surprising then that people like Key Compton (founder of numerous U.S. technology companies and Managing Director at the GPO fund) are saying that the ICO is the future of capital markets.

Not all ICOs are created equal.

Let’s get down to the basics just for clarification. There are broadly three groups of tokens: Payment, Utility and Asset, and what’s the difference between them? Well, a Payment token is like a currency; a Utility token can be exchanged for goods or services (like a voucher); whereas an Asset token is essentially a financial instrument — like a share or bond. This last definition is what most ICOs are keen to avoid, so they don’t get scrutinised first as and when the regulation hits. Many token generation events hence position their offering as Utility tokens — although their claims appear in some cases, to be rather tenuous.

Our chairman Eric van der Kleij recently chaired a key panel at the Crypto ICO Summit 2018 in Zurich, where the big guys eventually discussed Utility tokens:

“I asked the panel what percentage of the ICOs, that came to them, claim to be a Utility token and what percentage, in their opinion, actually were. Their answer was that the large majority believe they offer a Utility token, with less than 1 to 2% actually being one!”.

See that radical deviation? Then why do these tokens say they are ‘Utility tokens’ when the professionals think they are not!? If we’re being generous, we might believe ICOs ‘miscategorise’ their token because there has been no reliable third-party test or standard that can determine whether a token truly is a Utility one. The US standard “Howey Test” determines whether or not certain holdings are securities. Sadly without one for Utility tokens, project teams end up paying piles to legal advisors for a 50%-unsure opinion. If they are lucky enough, then they get to speak directly to the regulators.

The truth is that a test or standard can accelerate broader adoption. There are good steps being made in that direction already — for example, the recent Wyoming laws and the Swiss regulator definitions. We all know Utility tokens offer significant benefits to the project itself and the supporting community by providing better access to goods and services, thus understanding the meaning of Utility is by default important.

Token generation events are abusing the opportunity that ICOs provide to raise fast capital, in the belief that they can avoid securities regulations by creating notional Utility tokens. Well I suppose financial services regulations are there for a reason. David White, CEO of Keybox, has strong opinions on this, “Consumer protection is the most important role of the regulator. You can’t just get around that by writing a smart contract.” Very true. Keybox spent a considerable amount of effort to be accurate on some of the defining characteristics of a Utility token. Again quoting David, “There must be an economy that uses the token in a way that would not be possible with fiat currency. For example, a service that rewards global participants with micro-payments for specific actions — as we have structured for our distributed key security service, Keybox”. There you go. Simple and clear.

Eric had more to say about responsibility allocation at this stage. “Professional/ICO advisers share the responsibility of not encouraging their clients to wriggle around this. There are many good, compliant solutions that allow things such as crowdfunding-with-perks to be used for equity and discounted access to services. If they do they risk retrospective punitive action by the regulators, and in fact are encouraging knee-jerk stifling regulations, that could slow down the development of the industry.”

The most profound use of a Utility token is, I believe, yet to be discovered. I’m pleased to announce that we will be launching a utility “tokenwatch” service for the potentially-unlimited examples of Utility tokens. Let’s hope there will soon be enough examples to hang our hats on.