Wednesday, 23 May 2018

Security tokens? Inevitable.

Token economy that emerged several years ago is moving forward, despite all regulatory and technical hurdles.
Without going too deep into details and not trying to create some nomenclature when it’s probably a little too early to do so we could break down tokens issued on blockchain platform into three types.

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.

I would also like to mention another type of tokens, which can be called “backed” tokens. Stable coins tied to actual fiat backing, tokens backed by commodities and such are typical examples. They are somewhere in between utility and security tokens, just as traditional commodity instruments and currencies are not exactly securities.

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.

From regulation perspective the issuance of utility tokens is the least complicated, and security tokens issuance is the most complicated legally. That is why blockchain entrepreneurs are trying to circumvent securities laws by attaching some real or fake utility to their ICO token and obtaining a legal opinion confirming that it is not a security. In many cases it does not look too good, 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.

Equity tokens are going to be regulated by SEC’s of the world. Their issuance might have different rules from IPO’s, they might be some limitations, or different reporting standards, but they clearly fall under jurisdiction of traditional SEC’s. Actually there’s a related question — who is going to regulate an issuance of utility tokens, since most tokens issued at ICO are essentially securities, having not so much utility and being more of a promise to create some utility later on. This will be a topic of another post, though.

Now I’d like to emphasize that security tokens support is going to be a new milestone for Waves ecosystem, and we’re ready to offer fully compliant solution for equity tokens issuance and trading. 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.

More interesting of course is public equity ICO’s. We are in talks with several jurisdictions regarding this, with the goal of licensing of Waves DEX as a securities trading and issuance platform, and applying for corresponding licenses. 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.

By Sasha Ivanov 
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