Over the last few months the cryptocurrency space has been red hot. While Bitcoin takes a huge portion of media attention (especially given current all-time highs), the ICO market has been extraordinarily explosive, too. But, with massive interest and money flowing into ICOs from seemingly all directions comes plenty of confusion along with it.
If you’re planning to get some skin in the game, it’s important you get your head around the lingo and avoid running headfirst into a money-losing problem.
In this piece we break down the differences in terminology (app token, utility token, security token… Which is it?) from vantage points of 4 important members of the ecosystem to help you try and clear it up:
Towards the end of July, the SEC (Securities and Exchange Commission) finally broke their silence on the budding ICO space, by releasing a statement regarding Swiss foundation The DAO, in which they essentially called them out for breaking U.S. securities law.
Fortunately (or unfortunately depending on whether you’d lost money or not), the DAO project had crumbled well before the SEC’s edict.
Had the tokens been trading on the open market, however, it could’ve been a seminal incident in the young ICO market’s history. It’s not hard to imagine that the token’s price would’ve tanked and maybe taken many altcoins down with it.
Scrutiny of ICO’s has stepped up globally, as evidenced by China’s all out crackdown on ICO’s in the country back in September followed by exchange suspensions in October.
The silver lining here is that in the wake of The DAO ruling, ICO participants have started to take measures to ensure they don’t make the same mistake – a positive development for the nascent funding method in the long term.
In an attempt make it crystal clear to regulators and investors alike that tokens are not securities, a whole host of novel phrases to describe tokens have sprung up. You might’ve seen the likes of “app coin,” “app token,” “utility coin” and “utility token” used interchangeably to do just that.
How does that fly from a legal standpoint? Is that enough?
Well, according to Joshua Ashley Klayman, a blockchain-focused lawyer at legal firm Morrison & Foerster, err not really…
In her words: “Most responsible securities lawyers would have said that The DAO token was highly likely to be a security… When people ask about app tokens, it’s because they want to get out of the securities space. They don’t want to be constrained by securities requirements.”
This leaves buyers and sellers of tokens in a confusing grey area because most of us don’t have the legal training to make this deduction. Geography wasn’t protection enough, either. If the tokens are purchased by U.S. investors, SEC laws apply regardless of the country of origin. One tip she did offer, however, is that if the token has actual utility within the project from day one, it is likely considered a token.
Understanding the securities-token divide is a problem venture capitalists are also struggling to grapple with.
Toronto-based VC Greg Murphy believes that there really “isn’t a good [definition]” to be had and that his portfolio companies are at the mercy of their lawyer’s interpretation every time they create a token. A view which can change if regulations do.
He continues: “You have to ask yourself: Do you really want to take on potential liability if there is the chance of it being deemed a security in the future?”
Unsurprisingly, those at the centre of the action also agree that definitions are extremely hard to settle on.
CEO of MakerDao, Rune Christensen, believes clear cut distinctions between utility tokens and app tokens are fundamental to establish, if the sector is to be successful:
“The majority of ICOs that are happening now are in fact securities and should follow the standard process for securities offerings. They are fooling naive investors into believing that they are buying a piece of decentralized infrastructure when, in fact, they are only buying the promises of the management team.”
The balance between regulating token-based security offerings and innovation within the decentralised app space must be managed with delicacy.
He continues: “It could be really destructive for innovation if the wrong tokens are deemed to be securities when they are not.”
The bottom line here?
Well, this question isn’t going anywhere any time soon… Watch this space.