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Does this product make sense? Is there a clear explanation of what the network does? Is there a clear use-case for the token? Has the developer been transparent about where funding will go? Is the project an open public blockchain or is it an opaque, unclear technology? Is it something marketed as a good or for speculative profits?
Also Read: The Differences Between an IPO and ICO
These are the things to look out for when considering the latest new blockchain hype, according to Coinbase product counsel Reuben Bramanathan.
Coinbase, Coin Center, Consensys and the venture capital firm Union Square Ventures decided that the burgeoning blockchain token industry needed an open-source regulatory framework for entrepreneurs and technologists designing blockchain tokens.
The group published a set of best practice principles for crowd sales of blockchain tokens. The Blockchain Token Securities Law Framework and the Framework Tool are available online. The group engaged a leading US law firm to do detailed security law analysis about blockchain tokens.
Difference Between Security and a Token
Are blockchain tokens securities or not? “If they are, then developers, the users, and exchanges who support these tokens might be subject to securities law,” Mr. Bramanathan suggests. “It is necessary in its first stages of development to foster a regulatory environment that won’t stifle innovation. We found that, depending on characteristics of the blockchain token, the token may or may not be a security.”
So, not all blockchain tokens are securities.
“These new distributed or decentralized protocols being built on a blockchain are somewhere between a traditional security and decentralized blockchain token,” Mr. Bramanathan told Bitcoin.com.
Four Aspects to Determine a Blockchain Token
Researchers uncovered four key aspects which would determine whether a blockchain token would be a security. The first is the use-case itself.
“Does the token have some valuable, practical use-case within the network?” the bitcoin legal counselor poses. “If so, then it’s less likely to be a security, which tends to have no actual use and are purely speculative.” The second is marketing around the crowdsale.
“If a developer or the people doing the crowdsale market it as an investment opportunity, ICO or something framed by profit, that is more likely to be a security then if it marketed as a crowdsale token for a network.” The third is the duration of time between the crowdsale and launch of the network.
“The closer to the launch of the network, the less likely it is to be a security because it’s less speculative,” he explains.
Presales Aren’t In-and-of Themselves Scams
“Some people in the space believe any pre-sale of a token would automatically be a security,” observes. “We find that’s not necessarily the case. The use-case and the marketing of the token matters.” He offers an analogy.
“Take Kickstarter, where you can contribute to a project,” he explains. “You might receive some product when it’s eventually completed. The fact you pay for product then you get the product later when it’s made doesn’t mean it’s a security.” It’s just a pre-sale of a product.
“If one needs the token to participate in the network, then it’s a token that allows me to access cloud storage or cloud processing power or to vote on some prediction market,” Mr. Bramanathan elucidates. “These are more likely to have an actual use case in contrast to a token that does not have any inherent use. It’s just a right to some process to be repaid some return. Then those passive things look more like a security than the active things which you buy to use the network.”
The Developers Must Be Compliant
The main challenge for legal analysts is developers selling coins months or years ahead of an offering’s release. Ultimately, while consumers must be careful, developers will be the ones who could face legal repercussions if they design an gray market blockchain security.
“The impetus is on developers to provide a clear disclosure about the network protocol,” Mr. Bramanathan says. “The developer allows participants to know the project and its risk. We want to help the industry to work out the best protocol for token crowd sales. We need clear guidelines to help people distinguish between potentially useful tokens, risky ones and the outright scams.”
What do you think of blockchain tokens and securities? Let us know in the comments section below.
Images courtesy of Shutterstock, Twitter
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