Young companies that decide to go for an ICO have a serious dilemma they need to face: which kind of token to issue? How to remain on the right side of the various constantly changing regulations on the subject? This becomes especially difficult if you plan on going international, as the legislation varies in every part of the world. We at Swace have found a solution that works, at least for us, and is legal by Lithuanian and EU regulations. Hopefully, sharing it can be helpful to those of you who are still grappling with the dilemma. But first, let us explain a little about the kinds of tokens that exist right now.
Normally, two kinds of tokens are distinguished: security and utility. A security token is in fact a document which confers certain ownership rights on its purchaser. It is a very advanced form of IOU, if you will, which lets its holder lay claim to some future profit. Let us put this in legal language:
Article 1. 101 of the Civil Code of the Republic of Lithuania stipulates that securities are documents confirming the obligations of the issuing person (issuer) to the holder of the document […], the right to receive from the issuer interest, dividends, part of the assets of the company under liquidation or of funds lent to the issuer (shares, bonds, etc.), the right or obligation to acquire for payment or gratis or dispose of other securities […], the right to receive certain income or obligation to pay in case of a change in the market prices of the securities (index, etc.).
The other kind of token is a utility token. These are tokens which are intended to provide access digitally to a service by means of a blockchain-based infrastructure and offer owners a clearly defined utility within a network. In other words, when a user purchases utility tokens during an ICO, they are gaining a sort of coupon for future services, when the app is launched.
Many people contribute to ICOs offering utility tokens with the hope that their value will increase. The Strategic Coin website makes the following comparison:
Utility token price fluctuations can be compared to those of sporting event tickets. The value of a ticket to a future sporting event may increase if one or both of the teams wins a significant number of games and becomes a contender for the championship. On the other hand, that same ticket may decrease in value if a star player suffers an injury or a team goes on a prolonged losing streak.
For some, neither of this is the right choice. If your intention for the token falls somewhere in between, then you may benefit from the solution suggested to Swace by the Central Bank of Lithuania and our legal advisors at COBALT Lithuania. It is called a payment token.
The token Swace is offering, SWA, is neither security or utility. When you contribute to the Swace ICO, you do not gain ownership of any part of the Swace company. Nor are you getting a promise of future services. What you are getting is a sort of locally applied currency. When the app launches (May 2018, mark your calendars), you will have in your in-app wallet some means of payment for goods or services.
In our app’s ecosystem, you will be able to pay to take part in games, and also purchase Swace partners’ goods. This does not mean that you are buying a service from our company. It’s more like exchanging money in a foreign country so that you have a way to buy things there. When you hand over your dollars or euros and get a matching amount of rubles or rupees in return, you do not expect anything in addition to the money. You simply put it in your wallet and later choose how to spend it. This is how a payment token works.
Here is what our consultant, Senior Associate in Tax Practice Group at COBALT Elena Vėgėlytė has to say on the subject:
We are very happy that more and more Lithuanian teams are choosing Lithuania for their token generating events. There is no need to search for other jurisdictions: Lithuanian authorities are open and willing to provide consultations on crypto events; the blockchain community is strong and supportive; cost-wise Lithuania is much less expensive than, say, Switzerland or Gibraltar. Swace has made use of all these benefits: they have a written official confirmation from the Lithuanian Bank stating that SWA does not qualify as security, they had a meeting with Lithuanian Tax Authorities to consult on various tax aspects, and they have a great team and the support of various consultants.
In Lithuania and worldwide we see a trend of legal compliance. Teams willing to attract investment do not structure hidden profit distribution schemes. Instead, they search for ways to comply with all legal requirements by issuing security tokens. Others, such as Swace, have a product and choose token generating events for marketing purposes, their pure aim being to expand the client base. From the tax and legal perspective, SWA is qualified as a multipurpose voucher which allows both the seller and the buyer to have reasonable expectations on their rights and obligations.
I am happy to be able to work with this client, whose services I personally plan on using.
For more information on the Swace ICO, starting May 14, visit http://swace.io.
