Token Sales Regulation, Part 2
In our previous post, Token Sales Regulation, Part 1, we discussed the difference between investment tokens and utility tokens as it relates to their respective functions and how each might be viewed by the SEC when it comes to regulation. By the strictest definition, a token as investment is something purchased with the belief that its value will increase by virtue of the knowledge and leadership of the individual or team issuing the token. Utility tokens are those purchased with the intent of exchanging that token for the goods or services that are promised by the issuer.
Where the matter can become more complex is in the relationship between tokens and their status as an investment or utility token, and whether that status can change over time. An ICO token for an eventual service can begin as an investment as the network is being developed, but as soon as the service is up and running, the token becomes a utility token. In the case of something like Bitcoin, the tokens are themselves a utility for sending money from user to user, but many people hold them as investments, believing that the value of a bitcoin will increase as more people start to use the Bitcoin network. ‘Ether’ tokens are even more so a utility because they are used to run smart contracts on the Ethereum network. An Ether presale token is a utility, but one whose value is created by the issuer — it’s more speculative that it will be useful based upon the work of Ethereum sellers and developers. It moved from something where the value came from the issuer to where the value is based upon the network.
Examining different types of tokens allows us to attempt to predict areas where there may be regulation and where SEC may have jurisdiction. It goes back to test of whether the token is an investment and whether the purchaser is relying upon the issuer for the value of the token rather than a network. The SEC is flexible in how they judge the issue, and there is hope that they will limit their scope of regulation to the types of tokens that are clearly investments reliant on an issuer for value. Centralized virtual currencies, or tokens backed by physical currency, will be considered money services businesses that are subject to registration and regulation by the Financial Crimes Enforcement Network (FinCEN). For cryptocurrencies, as the tokens are issued by a network, any intermediaries that are money services businesses that fall under FinCEN are then subject to their requirements. For tokens that aren’t an investment or security, those would fall under the jurisdiction of the Federal Trade Commission as a product and would be subject to any FTC laws and regulations as to how they market themselves and conduct business with consumers.
