Tokenized Securities are the Future—that’s why we launch one
*Disclaimer: This article is not to be considered as legal advice or any form of encouragement to issue non-compliant token models in any jurisdiction.
A widespread uncertainty surrounding the legal categorization of crypto assets prevents many projects from realizing token models that might be perceived as a security within a certain jurisdiction. The investor’s participation in an automatic revenue or profit redistribution of a project is an excellent way to first finance a product and share the generated value with investors later on. Yet, a majority of projects end up creating complicated token economics and adding functions or layers that only serve the purpose of justifying the issued token as utility token. This approach leads to inefficient solutions with poor future perspectives, imposes unnecessary risks on investors and ironically it leaves a crucial fact out of consideration: even utility tokens in their majority, will be categorized as securities in most jurisdictions. The Swiss Financial Authority FINMA demonstrated with their last publication that any utility token whose underlying platform was not functional by the time of the token sale, will be treated as security. Ok, and now?
Tokenized securities will succeed in the end. Legal uncertainty will fade as soon as the first jurisdictions offer a secure haven for setting up companies and offering this kind of crypto assets. Why? Simply out of the same reason why digital money will succeed: the time is right. We have reached a digital age in which the creation, transaction and record of values in a digital form is possible. Done correctly, this saves time and resources, increases security and most importantly, it provides global access. People in countries like Venezuela or Zimbabwe, who initially got familiar with crypto through the remittance industry, appreciate crypto currencies in face of highly volatile state-issued currencies as well as unreliable financial politics due to unstable governments. Simultaneously, individuals in China, Russia or South Korea have used crypto assets as a way to diversify portfolios and invest in alternative, digital and state-independent assets.
From an entrepreneur’s perspective the relatively easy creation of a security token is just a modern and efficient way of securitization that comes with unequivocal advantages such as higher flexibility, global access and more liquidity. However, coming back to legal issues, it is has become a recent matter where these “outlaw securities” can be traded once they are issued. Well-funded pioneers like Lykke or tZERO foresaw this development and already applied for security trading licenses early on. Now, they are in the beneficial position to provide almost exclusive market access for a growing number of tokens, although more and more exchanges are following. In the near future, the creation and trading of tokenized securities will become normal. Generally, there are three main questions that have to be considered prior to a creation of tokenized securities:
Despite the domination of media coverage and global perceptions by a US-centric view on crypto, not every regulator has the same opinion as the SEC. Jurisdictions like Switzerland, Gibraltar or Liechtenstein have a more open approach to the crypto market and even other countries like France for instance, are looking into innovation-friendly handling of ICOs. However, the SEC has a very long arm and is able to assert its rules in many other jurisdictions.
What kind of security?
Not all securities are the same. As an example: there is a huge difference between a company share and a value right. Even if a jurisdiction has a rather strict opinion on tokenizing company shares, there might be other options that can be successfully implemented with a capable legal team. However, it is always crucial to seek direct consultation with the according Financial Supervisory Authority in order to ensure the regulators benevolence.
Who to sell to?
Everybody agrees that the 2017 crypto market boom attracted some of the most unexperienced investors. Just looking for some fast money, their hopes often turned into financial nightmares. Depending on the kind of security a company is issuing, it might be a responsible move to set up certain access requirements for investors. This will not only effect the regulators perspective on a token sale but it also contributes to the longterm value of a project.
The Security we are issuing — MDS
Midas is an investment app for retail investors on top of the Melon protocol and will be financed through a Token Generation Event (TGE). The issued token, MDS, is an uncertified security under Swiss law. It is an IP-token that represents co-ownership/value right of the Midas module, the technology provided by Midas Technologies AG. The token entitles its holders to receive shares in the revenues generated by the Midas module, according to the amount of token held. These revenues are periodically and automatically distributed to tokenholders through a smart contract. MDS are freely tradable on any crypto exchanges where MDS will be listed later on.
Under Swiss laws and according to FINMA’s guidelines, MDS is an asset-backed token within the “uncertified security” class. These uncertified securities are defined as rights that, based on common legal ground, are issued in large numbers and are generically identical. The Swiss code of conduct’s only formal requirement is the bookkeeping and recording of the number and denomination of assets and their creditors. This can be easily done digitally on the blockchain. The issuance of uncertified securities does not require a prospectus or to comply with KYC/AML regulations. However, for full transparency and self-regulation Midas Technologies publishes a formal document mentioning all risks involved, and conducts a KYC process for all token buyers according to Swiss law.
Considering the time we had to wait and nerves we had to sacrifice until we finally received the crucial information that our token model is legally unobjectionable within Switzerland, it would have been way easier and faster to just come up with an unnecessary token economy and sell a respective utility token to some pump’n’dump investors.
Why all the hazzle ?
While starting to design Midas in beginning of 2017, one of the things that struck us about blockchain and smart contracts was the potential to automatically redistribute some of our project’s revenues to those investors that made the project possible in the first place. The concept of co-ownership of a revenue-generating technology just fitted exactly our needs. Our token is not equity. It does not come with a dividend tied to the profits of a company. It is an asset that pays a fee to perpetuity, directly from the revenues generated by our technology without any deductions through the private company. As long as Midas has active users, all tokenholders will receive an income.
With such a token model we are convinced to draw only those investors who really share our vision and have a long-term interest in Midas’ success. While we were waiting for legal clarity we looked with greatest skepticism at projects that built artificial token models and still raised way too big amounts of money. Most of these projects still haven’t delivered anything at the time writing. Midas does not force an unnecessary token on users. Owning MDS is not necessary to use the app. We only created a fair and sustainable investment vehicle that brings long-term success to our investors and lets us sleep well at night.
BTW: Midas just launched a Beta signup with Airdrop:
project information: https://midas.social