Coins/Tokens: Security Vs Utility
Cryptocurrencies and Coins/Tokens has not been for the feint of heart. What with the volatility, changes on the market, plus some fraudulent projects makes for a lot of things to worry about.
And now some coins/tokens are considered as securities and became subject to US federal regulations.
In July 2017, SEC (Securities and Exchange Commission) published a report, where main statement was that during investigation DAO Tokens were recognized as securities, and, according to which, some other tokens also can be classified as securities and become a subject to regulation.
Regulation is 1 is a Key question regarding crypto-related projects and tokens in particular.
Tokens can fulfill functions of currency, asset, company share, method of payment and many others, they are difficult to define.
Tokens then must have separate specific regulations, as they are new class of asset. Perhaps, that kind of regulation will come in future, but now part of them is treated as a security with all of the attendant restrictions.
The distinctive feature of security is that when you buy it you transform money into capital. The value of the security is that promises buyer dividends and profit. Securities allows one to own an asset without taking possession.
Hang on, but not all tokens are securities.
There are 2 types of coin/tokens: security and utility.
Security tokens are designed to be the company’s share, while utility tokens represent access to company’s product or service, i.e. have practical use.
Utility tokens are exempted from regulation and securities laws.
To determine whether token is a security or utility, SEC performs the Howey Test, designed in Y 1946 to recognize whether certain transactions are investment contracts. Projects who sell security tokens during ICO have to register tokens, while participants of unregistered offerings may be responsible for the violation of securities laws.
Issuing security tokens according to the regulations is easier and cheaper for the project than launching Token sale offering utility tokens , as it reduces legal risk. But, classified as security tokens are regulated, and so limited on who can invest in them and how they can be traded.
As a result, liquidity of such tokens is reduced.
Trading is greatly limited for security tokens , as they cannot be traded freely. This restriction may destroy the effects of network and prevent the development of a platform.
Utility tokens have a use case and are not designed as investments, but that does not mean that they do not bring profits to the owner.
They have a certain use case inside the project and do not represent a share stake in a company. Utility tokens may grow in price, if the demand for service or product increases. So buying utility tokens in a project, that solves real problems of users and is constantly being developed and improved, may give the owner great future profit.
Utility coins have a stabilization system.
If the price goes up too much, the demand, that is driven by its use, could decline, and in reaction to that price may also decrease.
At the same time if price falls, demand increases , and soon price will stabilize. The main aim is growing, or at least stable, demand, which can be assured by constant development of the token-related project.
Security tokens give the holder ownership rights, while utility ones have certain function inside the company’s platform.
So, it comes as no surprise, that cryptocurrency has become the subject of world government’s interest, as it is money not issued or regulated by a central bank.
Involvement of regulation is just another proof that cryptocurrency has become equal partner in financial world and the blockchain technology from which is springs is here for the long haul.
We are now seeing the the initial stages of regulation, more is coming, but despite attempts to control the world of cryptocurrency, people will come to have financial freedom as never before.
Have a terrific week.