Posted on

Legitimising the ICO Token: Finding Utility Over Security

Startup fundraising, in the traditional VC methodology, was flipped on its head in 2017 when a boom in ICO creation saw hundreds of companies forming on the Blockchain with its attached digital currency being born in the form of an investable token. However, this crowdfunding platform which exploded at a rapid rate has finally been hauled in by regulators and authorities who have noticed a few worrying trends. Bodies like the SEC have had a closer look at the tokens coming out of ICOs and in most cases declared them securities.

Suddenly, what is essentially an attempt to fundraise is subject to federal laws and the company, which is supposedly trying to create something innovative with the help of Blockchain technology, is expanding vast amounts of energy just trying to be by the books. But, there is a way around this. Not all tokens being developed off the Blockchain need to be of a nature that leads them to being classed as securities. There are a few other types of tokens that can be built off the Blockchain, including utility tokens.

While there are more than just two types of tokens, including equity, work, share-like and asset-backed, it is important to hone in on two types that can be used to define a new token coming through an ICO- the utility and the security token. In understanding the difference between the two, ICOs can choose a direction that can work better for them on a path of least regulation.

Securities Token

Towards the end of July last year, the SEC, on catching up to the ICO craze, dealt a telling blow to ICO regulation going forward. Looking back at the DAO tokens from 2016, the SEC declared that ICO tokens may be securities and subject to federal securities laws.

It was never intended for ICO tokens to be securities, but SEC chairman Jay Clayton noted that every ICO token the SEC has seen so far is considered a security and explained that if a crypto-asset issued by a company increases in value over time depending on the performance of the company, it is considered a security. “You can call it a coin, but if it functions like a security, it’s a security.” He added:

“Prospective purchasers are being sold on the potential for tokens to increase in value,  with the ability to lock in those increases by reselling the tokens on a secondary market  or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.”

So, by definition, a security token can be found by employing the Howey Test. This test seeks to find if a token has the following attributes- does it offer an opportunity to contribute money and to share in the profits of an enterprise managed and partly owned by respondents? And, secondly, does the scheme involve an investment of money in a common enterprise with profits to come solely from the efforts of others?

Clearly, the most common tokens seen coming out of the majority of ICOs fall into this categorization and thus come under federal law.

Utility Tokens

On the flip side, there is another style of token that can serve a role in many cases where security tokens are being sought at the peril of the company insighting the ire of securities regulators. A utility token can be defined “to represent future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments; if properly structured, this feature exempts utility tokens them from federal laws governing securities.”

There are already some highly successful utility tokens, as Vinny Lingham explains the use of utility tokens for Civic, his identity verification coin. “Civic has created one bln utility tokens that provide access to identity verification-related services in a decentralized, token-based ecosystem,” Ligham wrote on his blog. These tokens represent a unit of account for the network. The bigger the network grows, the more utility in the token,  and because the number of tokens is fixed. As the size of the network and transaction volumes within it grows, this will create demand for the tokens.”

As if to highlight the underutilization of utility tokens, it was reported that of 226 ICOs, only 20 are used in the running of their networks, that is to say, they are utility tokens, according to Token Report.  Storj is another example of a company that utilizes utility tokens, as their co-founder and chief strategy officer Shawn Wilkinson explains: “The Storj tokens we released allow people to use space on the network. We raised half a million dollars through the token crowdsale, and in 2015.” He adds:

“For many companies, utility appears to be an afterthought, but for a token to be successfully adopted into the community, it is the most critical component. With the amount of tokens on the market today, and new ones being launched every day, it’s clear there is a bubble, though the size of it might be debatable. When the market slows, the tokens that have no utility will ultimately not have any value at all.”

Utility tokens can be further explained as coupons for the company and the service it is developing. A real-world example is something like retailers accepting pre-orders of video games that have not been released. It is a token that differs from the usual ICO token that many are used to, and while it is not a perfect fit for every company, there already have been instances where utility tokens have filled a role in place of security tokens letting the Blockchain solution focus on its primary goal. This was seen with Filecoin which raised $52 mln.

Choosing utility over security

Of course, as easy as it sounds, choosing a utility token over a ‘normal’ security token to avoid the SEC, there is more to it than that. Some companies will rely on the securities nature of their token, but the standing on it is, there are a lot of companies that won’t.

There are an array of different types of utility tokens, each with different characteristics that could encompass an ICOs’ needs. If the company cannot find a place in any of the below categorizations, then they have a case for building a securities token. However, if the token can fall into them, then really, there is no need to create a new native token which could lead them through a regulatory minefield. It is first important to divide tokens into fungible or non-fungible.

Utility fungible and non-fungible tokens

These types of tokens are ones which are simply interchangeable for one another. The fungible nature of it means that the asset, good or token is interchangeable with one of equal value, and it does not matter about its individuality. Gold is often cited as a fungible asset as an ounce of gold, regardless if it is in coins, ingots or dust, is still worth the same thing.

Thus, in terms of a fungible utility token, where they are interchanged for one another, we can see more categorization. For instance, on the Blockchain, there is the possibility for the System Incentive Token, which essentially are used to get people on the network to perform a desired behavior. A company that bases its ICO around this operation does not need a native app and can operate with a host of other tokens.

The same goes for a voter token which is another situation where Blockchain and tokens come into play, but again, there is no need for a native securities style token for this. These governance tokens enable those on the network to vote, and clearly, a utility token is sufficient for this. In a similar vein, membership tokens are also classic examples of utility fungible tokens as again, the token is just being used to access the platform, and utilize the services.

On the other side of assets, a non-fungible item is one that is unique, such as land, or in the Blockchain space- CryptoKitties.Utility Non-Fungible Tokens are thus mostly used to determine ownership of a specific token or digital asset. So, with a number of ICOs, on face value, clearly fitting into the above-mentioned categories, one has to ask why they decided on a native securities-style token which will lead to regulatory pressures?

Beyond the definition

The definitions of security token and utility token, and even the other ones which are a little more niche are still definitions from a pre-Blockchain era.

Dejun Qian, founder of Fusion and the creator of QTUM, which currently sits in the top 20 on Coinmarketcap, explains that tokens are still a very new and unique Idea, and while people try and pigeonhole them, they should really be defined individually.

“The reason people try to figure out if token is a security or a utility is because people are thinking which laws the token needs to be compliant with. When people say that the token is a utility, it means that the token is designed and embedded in the Blockchain infrastructure. Naturally, it can then serve as a very important part in the Blockchain. It is very creative and can then also provide a lot if different opportunities for the Blockchain.”

But in Qian opinion, we should transcend the bold security vs. utility perspective: “On the other side, there is the token which is regarded as a security. We have current laws covering the securities industry, and there are a lot of things we need to comply with, so people think about it in a similar way. I think we need to put more effort on the utility side, and even something else far beyond only security vs. utility. Because from my perspective, tokens are neither security or utility, it is a new thing and we cannot put a new thing in an existing framework, to determine what it is.”

Posted on

Vivid History: 'How Money Got Free' Is the Untold Story of Bitcoin

An early bitcoin developer and entrepreneur, Alex Waters served as COO and CIO for bitcoin exchange startup BitInstant. Later going on to start several bitcoin ventures, he was also at the forefront of efforts to boost its regulatory compliance.

In this opinion piece, Waters reviews “How Money Got Free: Bitcoin and the Fight for the Future of Finance” (Oneworld Publications), arguing it captures the zeitgeist of the original cryptocurrency and the sprawling – all too human – movement that helped it reach the masses.


I have long suspected, owing to its sheer brilliance and idiosyncratic beauty, that bitcoin was in fact brought here by aliens from another planet.

Brian Patrick Eha’s vivid history of bitcoin, “How Money Got Free: Bitcoin and the Fight for the Future of Finance,” which captures in thrilling journalistic fashion what I experienced in my years working on this remarkable technology, only confirms my suspicions.

I regret not recording what I saw and felt while working on bitcoin — the fleeting moments of intense joy and dismay that once seemed too meaningful ever to forget. But at the time, it was all I could do to keep up with the pace, and my life became a blur of 80-hour working weeks devoted to the engineering project of a lifetime.

As the years passed, and the blockchain industry exploded, it seemed that these beautiful moments of intellectual adventure would remain only as fading memories, slowly dimming as I aged.

The idea that an author could capture the essence of that stirring time seemed impossible even in my most optimistic moments. Yet, just as I had initially done with bitcoin, I came to find in reading Eha’s book that I had underestimated once again.

From the top

Eha starts at the beginning, sparing no detail.

The era he eloquently describes was an alternate reality which brought together the brightest, hardest-working and most ideologically extreme individuals I have ever known. We shared common goals and an outsider camaraderie that only grew stronger as we made progress in the early years of bitcoin’s ascendance. Looking back, it’s sobering to realize that some of us were imprisoned or otherwise suffered as a result of the desire to improve and promote this new kind of money.

For some of my fellow pioneers, the intensity of their ideological commitments became a prison in itself.

Early bitcoiners collectively witnessed the radical dismantling of tribal and national affiliations, and the formation, in their place, of a new global citizenry. The birth of bitcoin and its blockchain was an important moment in human history – one whose legacy deserves to be documented.

“How Money Got Free” is precisely what I was yearning to read.

The fascinating detail and precise vocabulary of Eha’s writing provide a sense of closure for me personally. It feels cathartic to now possess a tome which records the visceral thrill of bitcoin’s rise, the earthshaking import of its innovations. As I read, I felt as though I were in the room witnessing the breakthroughs made by the first bitcoin pioneers.

The truth is, I have crossed paths with many of the characters depicted in the book.

Some of them were in close proximity to me for nearly a decade. Until now, I didn’t know why these people had joined the bitcoin community or how fate had guided us to share in this wonderful experiment. While I was busy working on cash remittance at BitInstant, I had very little insight into what others were working on in parallel. The challenges faced by Coinbase, Blockchain, BitPay, SecondMarket and others were just brief news headlines to me at the time, like billboards flashing past on the highway.

I had little appreciation for the depth of their intensity or the richness of the stories behind those headlines – all of which is conveyed in full through Eha’s narrative.

Consequently, “How Money Got Free” has changed my perspective on many of those people, some of whom I once thought of as competitors. What I’ve since learned is that we were all in the same boat, whatever our individual aims. Bitcoin itself is, in some sense, our parent organization, and its furtherance benefits us all.

Eha interviewed me for his book, as he did many of my former colleagues and acquaintances. When I asked what had motivated him to write it, he said that he wanted to shine a light on the pioneers and preserve the history of bitcoin’s formative years. (His book, which is both a work of investigative journalism and a tremendous feat of storytelling, focuses mainly on the period from 2009–2015, though Eha also examines bitcoin’s precursors, and an epilogue brings his narrative almost to the present day.)

The martyrs, explorers, creators, and pariahs who champion new technologies and advance society, Eha told me, are often overlooked or soon fall into obscurity. While every frontier has to be settled eventually, the lessons learned during the rough-and-tumble days are important – so that future projects are inoculated against failure by the hardships of the past.

Untold stories

“How Money Got Free” transports readers to the meeting rooms, startup couches, conference halls, online discussion boards and proverbial watercoolers where the cryptocurrency and blockchain industry took shape. It guides readers through the history of bitcoin’s implementation and explains its potential for the future.

Whether you are a bitcoin believer or a skeptic, Eha’s work will arm you with a deeper knowledge not only of the technology but of the human motives behind it. It is inspiring, evocative, and imbued with empathy for the dreamers – the “crazy ones,” as Eha puts it in the book’s dedication, echoing Steve Jobs – who move society forward.

As the book makes clear, bitcoin would not be where is it today had it not been for all of the people who clicked on a link, who read an article, who discussed, built, argued and invested. Small in themselves, each of these actions shaped our future; they contributed to the momentum of where we are going.

Naturally, our past informs our choice of what to write, what to click, with whom to argue and what to say.

Just so, early bitcoiners tended to have philosophical or political reasons for being drawn to cryptocurrency, and Eha is splendid at delving into primary sources and tracing the wellsprings of these convictions.

As we express ourselves through the use of these new technologies – the Internet, email, text messaging, social networks, blockchains – we stand to benefit from weighing the long-term implications of even our smallest interactions.

It is crucial for us to recognize and reflect on the journeys made and efforts undertaken to bring us our current way of life. But while some figures loom larger than others, every person who participates in bitcoin, even conceptually, is taking an implied risk. It carries social, legal, and financial consequences regardless of success. That risk and the willingness to take it, in the interest of furthering humanity, is what binds us together.

Eha’s book reminds me of something Faulkner once wrote: “The past is never dead. It’s not even past.”

Even now, it informs our actions, and we need to understand it if we want to understand where we are going. “How Money Got Free” conveys the essence of bitcoin’s past – not preserved in amber but alive with color and controversy.

For non-geeks, reading this book may be the first step toward acceptance of our inevitable future. It can serve as a permanent record for those who weren’t around to witness the events first-hand, and as an inspiration for all the dreamers still captivated by a transcendence which rivals the internet itself.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has ownership stake in BitPay, Blockchain and Coinbase. 

Old books image via Shutterstock

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email [email protected].