A token classification

Is your token a security?

Tokens

Credit: Pixabay

This article continues to cover ICOs and should be read after the article ICOs vs IPOs, published last month. In March, we tried to explain what ICOs are, by comparing them with IPOs, an established way on raising finance. Now, we try to explain what tokens are (or may be), by looking at their economic function and purpose. (In the world of ICOs.)

Switzerland is taking a leading role in the cryptocurrency and blockchain revolution. According to FINMA, the Swiss financial regulator, there is no generally recognised terminology for the classification of tokens, either in Switzerland or internationally.

FINMA categorised tokens in the following three types:

  • Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time
  • Utility tokens are tokens which are intended to provide digital access to an application or service
  • Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives

It also stated that hybrid forms are possible.

We have read many categorisations and like the FINMA the most. We find it clear, simple and practical. More so than any other categorisation we have read so far.

As we mentioned in the article in March, tokens considered securities are subject to securities laws, in countries like the US and the UK. The third type of token above falls under the securities laws.

How can you tell if securities laws apply to a token?

Protocol Labs, Cooley, AngelList, and CoinList collaborated to create the Simple Agreement for Future Tokens (SAFTs) framework, which allows ICO token sales to comply with the US securities laws. The framework is designed to ensure that tokens created are less likely to be a security. However, there is no guarantee that the SEC (the US financial regulator) would see it that way, says Morningstar.

In fact, the SEC is targeting SAFTs, according to Coindesk. The SEC now considers tokens as both utility and security at the same time. That is if an organisation sold tokens to parties that mainly looked for profit on their increase in value.

We suggest that if you want to offer tokens, which are in a gray area, you consider them securities and comply with the securities laws of all the countries in the scope of your project.