Colorado’s Digital Token Act Ushers in a New Era for Blockchain Businesses

Mar 22, 2019 · 6 min read

This story was written with the help of Anna Gonzalez, 2L, Loyola College of Law — New Orleans. It was sponsored through Echo Delegate one of the 51 forging delegates in the ARK Ecosystem and their generous voters.

The state of Colorado is famous for many things, among them is the Olympic Training Center where the country’s best athletes gather to train in their sport and achieve success for the United States at the international level. While Colorado is the premiere destination in the country for our nation’s best athletes, they are looking to make their state the ideal location for blockchain businesses. Colorado recently passed the Digital Token Act to exempt cryptocurrency from securities law subject to certain limitations. The Digital Token Act’s primary purpose states that a cryptocurrency shall be a “consumptive purpose,” and may not to be marketed as a speculative or investment purpose. Under the act, a consumptive purpose means to provide or receive goods, services, or content, including access to goods, services, or content.

One of the strongest sentiments behind the act is the belief in the benefits that decentralization can bring to business efforts within the state. Governor Jared Polis said it best when he said that “Blockchain provides a way to secure our data without relying upon big business or big government.” Even the act itself comments on these advantages. The act states that “blockchain technology has the potential to create new forms of decentralized “Web 3.0” platforms and applications that have advantages over the current centralized internet platforms and applications.”

The intended purpose of the Token Act is to “raise growth capital,” to expand Colorado businesses. The Web 3.0 is basically the migration of information and operations of the internet from an operating model that has become very centralized to a more decentralized model. For example, the Brave browser has an integrated crypto wallet that allows you to pay people directly for the work they produce and you consume.

The formation of the Digital Token Act was a collaborative process

Analysis of the Digital Token Act

The Digital Token Act states that if a blockchain business can articulate a utility and register that token with the state’s security commissioner, they do not have to go through the entire process of being approved as a security for the moment, but subject to certain provisions. Currently, most people that purchase crypto assets expect them to go up in value based on the work of others solely (i.e. security) but they also provide a utility. The utility being able to access or interact with a specific system. For example, trading your earned miles for an airline ticket.

It is important to note that the act defines a digital token as “decentralized units that must be recorded in a database, capable of being traded or transferred between persons without and intermediary or custodian of value.” Put simply, a “Digital Token” is a peer to peer based transaction that is easily traceable.

The act itself attempts to eliminate the burdens facing blockchain companies looking to grow and innovate within Colorado. The act notes the “costs and complexities of state securities registrations can outweigh the benefits for the cryptocurrency systems”. Assets are exempt if the issuer files a notice of intent, complies with the securities commissioner, and the issuer of the token must maintain either a consumptive purpose available within 180 days after the transaction or the following provisions must be met:

A) The consumptive purpose of the digital token is available within one hundred eighty (180) days after the time of sale or transfer of the digital token;

B) The initial buyer is prohibited from reselling or transferring the digital token until the consumptive purpose of the digital token is available; and

C) The initial buyer provides a knowing and clear acknowledgement that the initial buyer is purchasing the digital token with the primary intent to use the digital token for a consumptive purpose and not for a speculative or investment purpose.

The act also can change and be amended over time which is important for the nature and speed at which blockchain technology develops. The securities commission can create sections, guidelines, jobs, processes so that people can comply with the bill and most likely adjust those rules if they see a trend of abuse or violations.

The act also creates a safe harbor provision to protect blockchain companies and prevent roadblocks to innovation. The Safe harbor provision lays the burden of proof on the prosecutor to prove that the token is a security because the presumption by law is that it is not. Even if someone involved in the issuance of the token has received permission to issue a security, they are free from being charged for securities violations, not for other violations if any.

The Digital Token Act in Practice — ARK

ARK Would Flourish Under Colorado Law

While the Digital Token Act will not go into effect until August 2nd, it is important to understand how an established company would be treated under the new legislation. For this example, I introduce ARK because it is one of most developed and active projects in the cryptocurrency space that can be classified as a utility token. While we can write an entire volume on the application of the Howey Test to ARK, we can determine with sufficient certainty that under the Digital Token Act, ARK has established a consumptive purpose for their token.

To reiterate a consumptive purpose means that the digital token allows token holders to access certain goods, services, and/or content. ARK allows anyone to quickly and easily leverage blockchain technology for their own purposes. For the two years that ARK has been established within the blockchain space, they have already created fully functional desktop and mobile wallets. In addition, services such as ARK Pay allow merchants to easily set up a payment system in which they receive ARK for purchases made on their online store. From its inception, ARK has been used to pay for art, stickers, and even hot dogs just to name a few. Lastly, ARK has also recently launched their ARK Deployer V2 which allows users to create their own blockchain in less than half an hour.

Taking the above facts into consideration, it is very likely that ARK would fall under the definition of a digital token and meet the guidelines set for a consumptive purpose. Even in a worse case scenario, If the ARK token doesn’t qualify under the act, which is very unlikely, that doesn’t mean it’s a security. It would then be analyzed under the Howey Test, which identifies investment contracts and adds disclosure and registration requirements.

Senator Jack Tate, a co-sponsor of the act, stated that these types of regulations are necessary because of the regulatory uncertainty that surrounds blockchain technology. He stated that where there is uncertainty, there’s an ambivalence to making capital investments and business investments, in addition, companies who’ve made the plunge had excessive legal costs trying to sort through the uncertainty. The overall goal is to make sure Colorado’s innovative spirit stays in place.” Thus, not only would ARK flourish under Colorado law, they would be welcomed with open arms.

Thank you for reading. Make sure to follow the Blockchain Bench for more updates in the near future!

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