There’s a lot of talk about cryptocurrency tokens’ status in the financial world. Are they utility tokens? Are they securities? Or are they something else entirely?
Three Types of Tokens
Despite a brief lull in Initial Coin Offerings over the last few months’ bear market, the token economy in the cryptocurrency space is almost back in full swing. With that bullish momentum, of course, comes discussions over the regulatory status of tokens — and since not all tokens are created equal, the conversation can get quite complicated.
In an effort to simplify things, Sasha Ivanov, CEO of diverse cryptocurrency platform Waves, has weighed in to provide some clarity on what he feels are the three main types of tokens.
First, he identifies “utility tokens,” which are the safest and least likely to be scrutinized from a regulatory perspective. Wrote Ivanov in a Medium post:
Utility tokens are the most natural type of tokens for blockchain-based systems, since native tokens blockchain platforms are the original utility tokens, providing the utility of using the blockchain itself. From a legal perspective they are closer to digital products rather than to securities, and their issuance is not fraught with so many legal problems. Usually utility tokens are integrated into the digital product and provide some functionality within the product ecosystem.
On the other end of the spectrum, you have “equity, or security tokens” — which are, by far, the most controversial tokens in the cryptocurrency ecosystem today. Writes Ivanov:
And the most controversial token type is equity, or security tokens. They are backed by a profit or equity in a business that does not even have to be blockchain related. In most jurisdictions similar instruments are regulated by Securities and Exchange Commissions, with the most notable organization being US SEC, which provides very stringent reporting and compliance guidelines.
Sandwiched between utility tokens and security tokens are a third type of tokens, which Ivanov calls “backed tokens.” These tokens are those which claim to be backed by actual fiat currencies, and often advertise themselves as stable coins. These are a bit more complicated than its siblings in the token space, as they fall in the gray area between utility and security tokens — similar to traditional commodity instruments and currencies.
‘You Can’t Make Every ICO Token a Utility Token’
Ivanov also noted in his Medium post that many blockchain entrepreneurs are doing their best to circumvent regulation and securities laws by claiming their tokens have some kind of utility — even if that utility is entirely fake. “In many cases it does not look too good,” he wrote, “being clearly an attempt not to be a subject of SEC scrutiny.”
It should be clear that you can’t make every ICO token a utility token. Some projects clearly need tokens of a security nature. For example, many projects promise to do a buy-back of their tokens, which makes them essentially a security. Besides, it is reasonable to surmise that eventually all financial markets will use blockchain tech, no matter what the nature of the instruments in question is. It makes the emergence of security tokens inevitable, despite all legal and conceptual complications.
Waves ‘Will Lead the Way’
Because Ivanov already possesses a deep understanding of the blockchain industry and where it is going, he is already positioning Waves to be well ahead of the curve when it comes to bonafide security tokens.
According to the CEO, Waves is prepared “to offer a fully compliant solution for equity tokens issuance and trading.” He explained:
Our DEX technically is very well suited for security tokens support. Private issuance of security tokens is much less regulated, if you whitelist your investors and have a limited number of them you most probably fall under an exemption, with less stringent reporting. Whitelist set-up is easy to execute on Waves DEX, and there are going to be several projects launching on Waves with such an approach.
Most interestingly, Waves is positioning itself as the first regulatory-compliant decentralized exchange for public equity ICOs by initiating conversations with regulatory authorities in various jurisdictions and applying for corresponding licenses. Explained Ivanov:
We want our DEX to be the first regulated decentralized exchange, which is not an oxymoron as it may seem, since every successful DEX will still need some sort of KYC and AML policies. Blockchain is the future of securities trading, and we will lead the way.
What do you think of Waves’ plan to become the first regulatory-compliant decentralized exchange for public equity ICOs? Do you agree that Waves is shrewdly planning ahead? Be sure to let us know in the comments below!
Images courtesy of Shutterstock, AdobeStock, Waves