The core difference between the Utility Token model and Securities

In the last 3–4 years the number of crowd sales (called Initial Coin Offering) and the total amount of funds raised during these incentives have grown to the point (according to the data, provided by the CoinDesk) — from $1.5 billion to more than $695 million. To name just a few projects widely supported by VC blockchain funds and cryptoinvestors: Bancor (+$150 Million), Status (+$200 Million), Civic (+$33 Million), Tezos (+$200 Million), EOS (+$200 Million).

The widespread of ICO launches (approximately 30 per day at the moment) made different law institutions and yet the whole countries (China, for example) put restrictions on the processes of investing new technology startups, many of which don’t even have the real business model or MVP (minimal valuable prototype) tested or developed. Aт appropriate mean to constrain the non-professional investors from participating in some “scam” projects and in some way — an incentive to avoid money lose (from investors side) and money laundering and speculation (from the side of a startup).

In this case, let’s examine the difference between Securities, Utility Tokens in relation to the Token model chosen for the WishFinance Lending Platform.

Let’s start from the beginning and define the meaning of the term “token”. A token is just another term for a type of a privately issued currency or let’s call it a digital asset. A currency, in this case, should be understood as a mean of providing some transactional value inside the system, platform, protocol, etc. Token in its essence provides the users an access to the system and its features or services and as well empowers user interaction, distributing rewards, benefits to the token holders. In this way, a token helps create transactional economy between some user groups inside the system — becoming a payment method directly attached to the system infrastructure and its core capabilities. So the token-based model helps a startup avoid expenses on integration with third-party payment platforms. Usually, a technology company expands token functionality (from just the payment method) to encapsulating some additional features as — ability to run smart contracts, ability to vote and chose the project development vector and much more.

According to the William Mougayar article on token usage types and values, we’ve highlighted the WishFinance Utility token features with bold:

Taking into account the above mentioned model, WishFinance utility token, for example, is based on the Ethereum technology, it’s transferable — can be traded on the crypto-currency exchanges (the list will be announced later) and is developed to be used as a unit of interaction between the platform contractors — SME’s (small and medium-sized enterprises) and token holders, aiming to credit the SME development.

Basically, the utility tokens as described in Balaji S. Srinivasan post can be compared to API keys, used to access the service. The concept of a paid API key — is the best analogy to describe the utility token mechanism. Buying a token during the crowdsale gives a user ability to gain access to the system services (as well as traditional API key does). WishFinance token also operates as a service key, providing access to the platform infrastructure and its main functions. For example — when you buy an API key for Google Cloud Services — you get the direct access to its functionality and at the same time, you can gift a key, sell a key to some other person (but it’s rarely available). Tokens, on the other hand, are developed with this built-in transactional value — they can be transferred to other parties, sold, bought on the appropriate token exchanges or inside the system. This mechanism in its core helps increase the whole value of the service and provides Token with Potential Market liquidity. Usually, a price of a utility token grows in time, as the token can be freely traded in a global market (in comparison it can take up to 10 years for traditional investment equity or an asset to gain liquidity).

So what’s the difference between Utility tokens and Equities or so-called Securities?

Unlike company stock, Utility token value wouldn’t derive from any corporate entity but will completely depend on the user activity inside the platform. Traditional securities (which can be sold only to the so-called “accredited investors” (the 3% of adults with >$1 million in net worth in the USA) — represent real shares of a company, just like stocks and don’t usually have any additional utility capabilities.

Traditional securities regulation of the tokens and other digital assets is based on the well-known Howey Test (see more, W.J. Howey and Co. precedent). To consider an asset to be a security — it must meet all these 4 conditions:

1) buying not a utility but making an investment;

2) in a common enterprise;

3) with an expectation of profits;

4) based on the efforts of the promoter or a third party.

In order not to be considered a security an offered token should represent a use-value (in other words — giving a possibility to do something, for example, access the system, use system services) and not represent just a speculative source for raising additional profits.

In this case, WishFinance decided to use the Utility token model. According to the Coinbase’s Securities Law Framework for Blockchain Tokens a utility feature (a token represents a specific function or list of functions available for use of token holders) fully distinguishes a “blockchain token” from a financial security.

As a summary, let’s define WishFinance Utility token core capabilities:

• “WISH” tokens are built to provide access to the platform functions and infrastructure. The access to the platform cannot be obtained by any other form.
• Token holders will have the right to control and govern the platform development, voting for the programming of new modules and features.
• Revenues/profits can be gained only in terms of tokens deposit and a rent from other platform users.
• Revenue in this case requires real actions of a token holder and don’t represent the result of just mere token possession.
• Presence of revenues and its size fully depends on the user interactions and can significantly differ from one user to another.