LEGAL ASPECTS OF X8XWhat is a Utility Token? Is X8X really a Utility Token? Where are the arguments?
For too long, the question of the legal status of cryptocurrencies was neglected or even ignored.
Lately, with the USA establishing better control and China even banning crypto until further notice,
the crypto world has begun to acknowledge that rules and legislation have to be studied carefully
and legal measures have to be undertaken. It is not only the case that ICOs have to subordinate
to the laws of the country where their issuing company is established, but they have to become
responsible towards their investors and explore the legal aspects of their crypto token
in those countries where investors live and pay taxes.
There were several attempts to unite the standards for the legal status of Digital Assets (“DAs”),
but for now countries around the globe treat DAs quite differently. Although we can make some
general conclusions or summaries, we should not expect all tax, law enforcement and regulatory
entities to share the same view or position.
A generally accepted view, based on many articles, legal advice and reports divides digital crypto DAs into 3 groups:
1. Cryptocurrencies
2. Utility Tokens
3. Tokenized Securities
There is no strict definition of each group and there are some assets, that share similarities with more than just one group.
CryptocurrenciesSimilar to fiat currencies such as the Euro and the US Dollar, the main purpose of cryptocurrencies is to carry value and enable
transactions of value possible. That does not mean, that other crypto assets represent no value. The argument is in substance, in the main purpose.
It can be arguable as to what is the actual intrinsic value of cryptocurrencies, although some make a very
quick conclusion: “The true value of a cryptocurrency is in the trust of its owners and users.” If trust is lost,
deliberately or accidentally, cryptocurrencies usually lose all value and exchange rates plummet rapidly.
The opposite conclusion is not necessary true, cryptocurrencies with extremely good records and valuation
do not necessarily own public trust, as market speculation can still dictate the fate of exchange rates.
Cryptocurrencies usually have the ambition to become a payment vehicle, which means that owners
can buy other monetary or physical assets with these cryptocurrencies. Therefore, it is expected for t
hese cryptocurrencies to have a broad pool of owners, large enough to create its own economy, where
people trade goods and assets. Nevertheless, cryptocurrencies can have very unique digital encryption
techniques to reach consensus on approved transactions, often inextricably linked with the process of
issuance. Some of these mechanisms (e.g. staking) can bring some cryptocurrencies very close to the definition of securities.
Generally, if a DA shares most of its features with fiat currency then you are probably looking at a cryptocurrency.
Utility TokensNomen est omen. These DAs are mainly used for utilization of a service. You can imagine them as a
ticket or counter, that allows an owner to use a certain number of service functionalities, to gain certain
data, acquire better insight or upgrade. Therefore these tokens carry value, but usually the issuer is
quite indifferent or agnostic towards its trading value. The DA issuer should not be in a conflict of interest.
A utility token must be freely available to all potential users of the respected service or utility. Groups of users
can be smaller, usability can be pegged to a limited number of service providers.
But, what about the number of DAs in circulation? Can these utilities become securities, if you remove,
destroy or permanently lock or keep a certain amount of DAs, thus decreasing the number of DAs in circulation?
It is not definitive, lawyers tend to study a DA’s model closely before making any conclusion. Even buy-back
plans and programs, where an issuer returns some of the profit to a DA’s owners can be problematic, although
some (EU) legislations would classify these DAs as profit-sharing contracts.
The issuer of such a DA would not consider his ICO as an “investment opportunity”, but rather as a
“contributions to the cause”. Many startup companies found issuing their own DAs a very convenient
method to raise funds to build their infrastructure and ecosystems. The main purpose of distributing
their DAs is to grow a community of potential service users.
Tokenized securityAs for the USA, the Securities and Exchange Commision (“SEC”) announced a general test that decides,
if a DA should be considered as a security. The definition is reduced to simple questions, that make up the Hovey test:
● Is it an investment of money or assets?
● Is the investment of money or assets in a common enterprise?
● Is there an expectation of profits from the investment?
● Does any profit come from the efforts of a promoter or third party?
If the business model of the DA offers affirmative answers to these questions, the DA should d
efinitely be treated as a Security and thus comply with wider legislation. It does not mean, that
this DA is illegal, it just has to be registered with and overviewed by the SEC.
If you look for an ultimate confirmation, you should observe investor activity. If the profits arise
and are distributed without the need of investor to actively cooperate or contribute with knowledge,
actions or informations, then the DA is most likely a tokenized security.
