There seems to be a lot of publicity around these token these days. In this article, we’ll look at securities tokens. Continue with Cryptocurrency. First, let’s take a look at some basic topics:
What is Token?
Providing a precise definition of the token is a complex task. So if we want to have a general definition, a token is a symbol in its ecosystem that can represent a value, a share, a voting right, and so on. A token is not limited to a specific role and can play multiple roles in its ecosystem.
Cryptocurrency such as bitcoin, bitcoin, ether, etc. can operate independently of its platform. We can use them as a stand-alone currency outside the context that they have developed.
On the other hand, Golem, OmiseGO, etc. are examples of tokens that relate to a particular platform (in this case Ethereum). In fact, a token is the symbol of an asset or application that an organization gives its investors at the initial coin launch (ICO).
What is an ICO?
The “ initial coin offering “, or ICO, shortened to Initial Coin Offering, is actually crowdfunding of Cryptocurrencies that is done to raise initial capital to launch a project using Cryptocurrencies. It can be said that ICOs have revolutionized various industries. Here are some of the benefits of ICOs:
- ICOs provide the easiest way to raise funds for decentralized application developers (DAPPs) for their projects. Anyone can participate in any project they wish. In fact, by buying tokens for a particular project, the investor will become one of the contributors to that project.
How does an ICO work?
First, the developer issues a certain amount of tokens. By keeping the number of tokens limited, one can be assured of value and the ICO pursues a goal.
Tokens can have a predetermined fixed amount or may decrease or increase based on the way the sales and demand are collected. The transaction will also be very easy. If a person wishes to buy tokens, the number of tokens, Ether will be sent to the investor address at the number of tokens.
The investor receives tokens when the smart contract ensures the transaction is accurate. Since Ethereum is inherently decentralized, the ICO developed on its platform will succeed if it is fully distributed and not controlled by any entity or entity.
The EOS ICO, which is not long after its launch, has managed to raise $ 4 billion in a year and has been the largest ICO in history to date. According to statistics provided by TechCrunch, since 2017, blockchain-based startups have attracted 3.5 times VCs through ICOs.
How does a token make value?
Before we look at different types of tokens, let’s see what kind of values a token can create.
As William Mougayar writes in his article on Medium, the value of creating a token is based on three basic principles:
Now it’s time to consider each of the roles that a token may have.
By purchasing and owning such tokens, the holder will include certain rights to the network, depending on the number of tokens it has. For example, by purchasing a DAO token, you will be entitled to vote inside the DAO, and you can determine which projects are funded or which are not funded.
Exchange of value
These tokens create a platform-based internal economic system that helps buyers and sellers exchange value in that ecosystem. With these tokens, people can receive rewards by completing specified tasks. Creating and maintaining independent and independent economic systems are among the tasks that these tokens perform.
Realization of specific rights
These tokens can create special rights for the token holder to perform various functions within a system. Golem is one such example. You can access and use Golem supercomputers by purchasing Golem tokens called GNTs.
These tokens provide a rich user experience for their owners. For example, in the Brave browser ecosystem, BAT owners (tokens of this platform) can use their tokens for advertising and other services.
These tokens are used to store value and perform transactions inside and outside the ecosystem.
Distributes profits and other economic benefits to investors in a particular project.
How do these definitions help to evaluate a token?
A higher value token should have more than one of these roles. In fact, the more roles a token can play, the higher the value of that token.
Now that we are familiar with the concept of tokens, how they are distributed and their value, it is time to describe the Howey Test .
In the year 1946, the US Supreme Court adjourned a historic case. This case, which was a fight between the US Securities and Exchange Commission (SEC) and Howey Company, created a conceptual basis called the Howe Test. In this case, the issue of whether the transaction required a legal and investment contract was examined in the case.
Two companies in Florida signed a contract to sell a large citrus cultivation land. The two companies had offered buyers to lease the land to them, and they had picked up the land, sold the crops, and shared the profits. Since most buyers did not have the agricultural experience, they fully embraced the idea of renting land.
The US Securities and Exchange Commission declared this illegal and immediately complained to the sellers.
According to the commission, the defendant (Hawaii Company) violated the law by failing to complete a securities registration agreement. Investigations revealed that the defendant had backed down and acknowledged the necessity of signing security. The Supreme Court, therefore, issued a historic ruling in that regard.
They designed a test to determine whether a transaction falls into the category of an investment contract. If it can be considered an investment contract, it must meet the requirements for securities registration.
If a transaction has the following characteristics, it can be considered an investment contract:
- If it is financial investment.
- If investing in a public corporation.
- If the profit is obtained through the activity of a seller or a third party.
The term public corporation can be interpreted in various ways. Many federal courts, however, regard it as a hierarchical corporation where investors invest in a project.
Although the original version of the Hove test used the term money, in other subsequent cases, other forms of investment and assets other than money were added to the test.
Another point to consider in securities is the profit from investing. Does the investor play a role in controlling it? If the investor does not have any control over it, the transaction falls into the securities category.
Other alternative tests
The Howey test is not the only test available to determine whether an investment falls into the securities category. In , the US Supreme Court designed the family resemblance test, in which traders proved that they were not securities by similarly showing their contract to similar investment contracts.
Some states have their own securities registration laws, sometimes called Blue Sky laws. The reason for this naming is the blue cover of the book. We read this rule on Wikipedia:
The first law in the Kansas Blue Sky Series was passed at the request of the state’s banking commissioner in 1991, Joseph Norman Daly, and was used as a model for similar laws in other states. Between years 1911 and 1933, four states adopted blue sky laws (Nevada was the only state that refused).
Historically, federal securities laws and blue sky state laws complement each other and in some cases duplicate each other.
DAO and the Securities and Exchange Commission
DAO tokens (hereby referred to as DAO, decentralized PA) have failed to meet the requirements listed in the Howey Test and have been recognized by the Securities and Exchange Commission as securities, the Howey Test and Securities Test have been the focus of many. The discussions of the crypto community have become.
Ash Bennington, in an article on Coindesk, explains why DAO tokens were securities:
Not too long ago, they started a group of DAO developers.
DAO developers were saying:
Everywhere is filled with decentralized projects and there is no way to fund them because they need money to make money.
Well the solution is up to me. I tell you what to do, write code first and then sell tokens. The people who buy them share every benefit of the project.
We code it and they choose the project, the projects succeed and everyone benefits.
The Securities and Exchange Commission said:
This is a portfolio!
DAO developers said:
No no it’s just token sales!
Finally the Securities and Exchange Commission said:
We are dealing with securities because of the outcome of the Howey test and the fact that there is talk of investing and a publicly traded corporation and profits from the result of someone else’s efforts other than the investor.
Why this investigation?
It was caused by the famous hacking of DAO (here’s what DAO stands for). In this section we will outline the following:
There was a flaw in the DAO smart contract, and a hacker exploited it to launch a re-entrancy attack and steal more than 50 million ether.
Since so many people had invested in the project and had nothing to gain, the Securities and Exchange Commission stepped in to protect the interests of investors and declared these tokens securities.
The head of the Exchange Commission, Jay Clayton, said:
The Securities and Exchange Commission is examining the distributed head office and other new technologies in this area and invites investors and traders to cooperate. We are looking for such innovative and useful ways to raise funds and primarily protect investors and the market.
These conversations have generated a lot of positive and negative reactions in the crypto community. As Ripple CEO Brad Garlinghouse put it:
Lawmakers will not step down and should not step down. For generations, they have kept us safe from the fraudsters now operating in the ICOs .
Roger Ver, co-founder of Bitcoin.com, also stated his opposition to the Exchange Commission’s position:
Let’s face it as it really is: some strangers unaware, the world’s peacekeepers are scared not to follow their orders.
So far, we are familiar with the concepts of token and Howey testing. It’s time to get acquainted with two of the most important tokens.
Types of tokens
The US Securities and Exchange Commission and the Swiss Economic Market Observatory have divided tokens into two major categories:
- Utility Tokens
- Security Tokens
Since most ICOs are investment opportunities in a company, most tokens are also securities if they are not classified as securities in the Howey Test and fall into the category of Utility Tokens. In other words, such tokens allow users to benefit from a particular product or service.
Jeremy Epstein, CEO of Never Stop Marketing, writes about the capabilities of usable tokens:
- These tokens allow their holders to use the network.
- These tokens allow their holders to benefit from the network by giving them the right to vote.
Because tokens have limitations in the number discussion, their value may also vary depending on the amount of supply and demand.
Finally it came to the securities tokens and how they worked. What kind of tokens are these tokens exactly?
Token a Cryptocurrency if it successfully passes the Howey Test, then known as securities. These tokens usually derive their value from a foreign and tradable asset. Since these tokens are known as securities, they will be subject to securities laws and related legislation. On the other hand, if an ICO does not operate within the prescribed legal framework, then it will be penalized.
What are the rules of securities tokens?
Anthony Pompliano has provided some interesting explanations regarding the types of legislation that apply to token tokens, which we will explain below.
According to him, since token securities comply with federal securities laws, they comply with them after the first day of implementation. For this reason, securities tokens must operate in the United States to:
- Regulations D
- Regulations A +
- Regulations S
Code D :
The Code provides for the special offer for exemption from registration by the Securities and Exchange Commission. According to the Regulations, token suppliers must complete Form D after the securities are sold. The person who submits these securities must receive money in accordance with investor regulation 506C.
What are the requirements of 506C ?
Investor credibility should be verified and the information provided in the securities transfer process will be free of any errors.
Code of Conduct A +
The statute allows SEC-approved securities to be invested up to $ 50 million in unverified investors.
Registering securities under this regulation takes more time than other regulations, and therefore, licensing through these regulations is more expensive.
This Code shall apply when the token is supplied in a country other than the United States or may not be subject to the provisions of Section 1993. In that case, the supplier must still be subject to the laws of the country in which the supply is made.
Remember that all of the rules stated in this section are Pampliano interpretations. Therefore, they cannot be considered as investment proposals. Keep in mind that any investment in this area will require consulting with relevant lawyers.
Why are securities tokens important?
Because the securities offered by token tokens exist in the real world and are like a bridge between the current financial system and the Chinese blockchain.
So what are the benefits of token tokens?
Currently the ICO space is a bit unpredictable and dangerous. Due to the lack of proper legislation in the area of applied tokens, follow-up is in vain. To validate the ICO space, a combination of crypto and traditional economic systems must be introduced.
Traditional economic recovery
Traditional financial transactions are generally expensive. Because when intermediaries and commissions are in the middle, costs will naturally go up. Securities tokens can shorten intermediaries and ultimately reduce fees. In the future, smart contracts can reduce complexity, cost, and paperwork.
Get things done faster
Traditional financial institutions involve a large number of intermediaries that slow down their performance. Securities tokens by speeding up these intermediaries speed up the securities issuance process. With the rise of securities, token tokens can become one of the popular investment methods.
Creating a free market
Today, investment exchanges are extremely local. And what does that mean?
Using securities tips, merchants can offer their products and services to anyone on the Internet. Exposure to this free market will help increase asset levels.
As merchants can trade with anyone on the Internet, the number of investors will increase exponentially with such a market.
Reduce the need for lawyers
In the future, it will be smart contracts that implement a wide range of securities token functions. This also reduces the need for lawyers, who are potential mediators themselves.
Lack of possible manipulation of institutions
As intermediaries are largely eliminated, the likelihood of fraud and corruption in financial institutions is greatly reduced, and there may be no sign of corruption in the investment process.
Secondary exchanges by tokens of securities can be done easily through registered and regulated tokens on the respective platforms. In this case, investors can easily convert their tokens into cash.
Despite all these advantages, it cannot be said that such tokens are problem-free. We will discuss some of these problems below.
Do Securities Tokens Have a Problem?
Removing intermediaries is a great advantage. But both the intermediaries and the benefits they provide cannot be eliminated. One of the problems with removing brokers is that the responsibility of the deal rests with the buyer or seller.
An intermediary, such as a financial institution, also has a positive impact on an ecosystem. Commitment, advertising around a product, fulfilling investor demands, ensuring investment security, and following laws are among the positive effects created by an intermediary.
Some critics have argued that these tokens do not meet the responsibilities that previously had been given to intermediaries and institutions. You just have to wait and see if their criticism is in place.
The crypto community breathed a sigh of relief when the US Securities and Exchange Commission announced that Bitcoin and Ethereum are not securities. Securities tokens currently have a much smaller market share compared to usable tokens. However, we do see a growing emphasis on the role of such tokens in Year 2, and these tokens will soon be accepted by different people. It is predicted that large volumes of capital will be marketed by Wall Street giants in the form of securities tokens. Securities tokens are legally more secure.
Carlos Domingo, the founder of SPICE Venture Capital, writes about the potential volume of the securities token market:
Securities tokens will be recognized as an investment vehicle, as Bitcoin is known as a currency. Because they provide a dynamic, direct economy to the investor. Any asset can be tokenized; the industry will generate several trillion dollars of capital.