Are All Tokens Securities?
Here’s a billion dollar question that has the blockchain community at the edge of their seats: which tokens are securities?
SEC Chairman recently stated that cryptocurrencies like Bitcoin are not securities, but most ICOs likely are. Here we’ll take a look at what some of the applicable laws are, but note: I am not a lawyer, and this is not legal advice.
The Howey Test
The most direct method that the SEC uses for determining if an ICO token is a security is the Howey test. The Howey test is named after the 1946 Supreme Court case “Securities and Exchange Commission v. W. J. Howey Co. et al.” A Florida farmer had raised capital by selling some of his orange grove to a group of investors. Rather than becoming farmers themselves, the investors provided capital and were acting as speculators on the land value. The investment was not registered with the SEC, and actions were taken against Howey and his investors once their plan was discovered.
The outcome of this case, which worked its way up the court system, was a very tight definition of a security by Justice Frank Murphy. Investment contracts were defined as having these characteristics:
- Scheme involves an investment of money
- In a common enterprise
- With an expectation of profit
- Solely from the efforts of others
Applying this to ICOs
There were plenty of ICOs in 2017 that met the definition above. There were also some that met a few, but not all of the above. There’s been a lot of focus by teams on avoiding price discussions, who want to avoid misleading token buyers with an “expectation of profit”. However, it seems that the fourth condition would be the easiest to comply with: take care that token holders must take part in the building, development, and use of a project. This could mean staking (which puts holders’ tokens to work securing the blockchain), regular participation for rewards, or a future token standard that requires use at some periodic interval (preventing or punishing rent seekers who do nothing but hope for passive income).
Early, first generation Ethereum ICOs all require participation for rewards: Digix and Augur require participation and voting, while Maker’s token is required to create and close Collateralized Debt Positions. Each of these tokens seems a strong case against number 4 in the list of characteristics above. They occupy a new territory between passive income and the gig economy, giving token holders rewards for being active in their prospective communities.
It’s utility tokens like these that seem to provide an incentive for the SEC to keep a wait and see philosophy, going after only the most egregious schemes and frauds.
Hedge’s Place in this World
Utility tokens provide new rewards and opportunities for investors, including incentives to be actively involved with their tokens. This level of interaction will require new software that is tailored to allow investors to securely access their tokens, bridging the gap between next generation financial opportunities and retail investors nationwide. This is why Hedge is creating unique custody solutions.
What Hedge Offers
Security:
Hedge leads the industry in providing secure wallets with proprietary best in class distributed cold storage practices. The keys to your funds never touch the internet and cannot be stolen by hackers. There is no single point of failure that can jeopardize your fiduciary.
Applications:
Hedge offers application interface solutions to make your apps work with our apps. Small regional bank looking to compete? Incorporate Hedge’s APIs into your app and give your customers the ability to buy and sell bitcoin through your institution.
Access:
Hedge is the only firm in the industry that gives you 24/7 access to your funds. We net settle transactions in a proprietary process that maintains the safety of keys in cold storage, but with near real time trading.
Let Hedge manage blockchains; you manage your clients.
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