If an ICO isn’t selling a security, what are they selling?
There is much debate on whether a cryptocurrency is a security within the crypto community, but from the U.S. Securities and Exchange Commission’s (SEC) perspective it is perfectly clear. Cryptocurrency is a security, plain and simple.
For our purposes at ICOXInnovations, rather than remain in what we perceive as a futile debate, we have accepted and embraced the SEC position of cryptocurrency as a security. It is how we are operating our upcoming Initial Coin Offering (ICO) and our business as a whole.
Where this gets tricky is that some ICO entrepreneurs, or crypto entrepreneurs, would suggest that there is a category of token today known as the utility token which is arguably not a security. And that might be something that is more along the lines of a loyalty card or (a token that) has couponing features, as an example. However, all this is moot as the SEC has applied what is known as the Howey Test (from a 1946 ruling) that, basically, shows regulators that any ICO or any token, so far, is a security.
Under the Howey Test, a transaction is an investment contract if:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party.
Again, our position is that we are moving ICOXInnovations forward based on the SEC “cryptocurrency is a security” view. Within that, though, it is ICOXInnovations’s view, that there will be and is a growing need for a different categorization of some tokens that still will be regulated as a security but function much more as what is being defined as a utility.
That doesn’t mean that as a utility token they are not securities but it’s our view that in time, and this isn’t a next week thing, a category of securitized utility tokens will emerge. We think that’s where the market is going to move on the utility token issues. It will still have oversight, it will still have regulatory things, but it will have some different parameters with a level of oversight on them.
There is a need for a utility token to have the ability to be more transactional and I believe that will happen. It’s too practical for it not to happen. It makes too much sense. But it will take some time for that to have some basis and regulation. From a technical perspective, that is already happening. We see tokens out there that do have security-like features. They appreciate in value or they depreciate in value. But they also can be used as a currency to level-up in a video game, buy additional virtual goods, or pay for virtual services. They might serve as rewards or discounts because you watched a video or partook in a survey and you can get paid. Eventually a path will be created to govern these utility tokens differently, and to regulate them in a way that will allow them to act a bit more transactional.
Most important in our view of utility tokens is that they allow for crypto economies to develop within companies and that these token will be more transactional. We believe that the economics of reducing cost, creating opportunity, eliminating friction are going to drive the market. The really cool and innovative start-ups debating that these are utilities and should not be regulated, it is an interesting discussion, but it is not what is going to drive the market.
What will drive the market are the economics of the existing economies and customers that are within these companies. So, we think the mid-market and the large companies utilizing blockchain to create their own tokens in their ecosystem (within their own customer bases) is a huge market.
The other driving component in the market, in our opinion, will be the tokenization of existing securities. Our view is this tokenization opportunity will move rapidly, faster than expected, because token attributes programmed into existing securities will reduce significant friction (as well as offer new features) in the existing securities ecosystem. Also, the current regulations are well suited for these securities tokens to start being designed, and once issued, will proliferate immediately.
Our view of the crypto market over the next couple of years isn’t necessarily building altcoins, or massive alternative currencies. Our plan is to build what we refer to as ICOXInnovations that enable organizations to build cryptoeconomies for their own products or services. For us at ICOXInnovations, there is a lot of noise around if a cryptocurrency is a security, but we believe it makes complete and logical sense to stick with the SEC direction. It is a security. So, we keep reminding ourselves – let’s build on that.