State of Securities: Token Regulation and Solutions

Over the past year and a half we have witnessed an incredible volume of international news and speculation, much of which regarding the matter of government authorities and their attempts to implement regulatory measures / controls on cryptocurrencies.

Not since the advent of digital payment services (from PayPal, to Revolut and mobile-only banks) have we seen phenomenon affecting finance in such a revolutionary way.

Blockchain is still a nascent technology however, and to liken it to previous innovations (backed by the old guard of central-banking titans) would be to do it a disservice.

Millenials and ‘The Crypto Rush’

In today’s economy, throughout much of the western world, we have experienced a challenge that has widely been referred to by many names. We’re going to call it ‘the millennial problem’.

It denotes the differences seen between the economic and professional opportunities that were available to past post-WW2 generations (such as ‘baby boomers’) and those offered to the young adults of today.

Generations which have grown up and lived through the new millennium as young adults.

It is not unreasonable to make the comparison between the desperation for fortune of today’s disenfranchised youth in light of blockchain – to that during the successive gold rushes in the 18th and 19th centuries across North America.

Regulation: What is it good for?

Like the days of the wild west (admittedly with less violence!), there is little to no effectively implemented regulation in much of the current crypto sector…

Regulation is important because it helps to protect unsuspecting individuals from being taken advantage of by the likes of confidence tricksters, scammers, and other types of fraudsters that are rife in the ICO market.

It is also important to implement appropriate and functional controls like KYC and AML (‘Know Your Customer’ and ‘Anti-Money Laundering’) to successfully combat activities such as money-laundering

Such illicit practices have been known to be used by criminal groups and terrorist organisations.

Security Tokens: Difficulties of Definition

Source: Smithandcrown.com

According to a piece published by Nasdaq in January 2018, there are three primary types of cryptocurrency which you need to know about.

‘Transactional’, ‘utility’ and ‘platform’.

They give little attention to the fact, however, that tokens can also fulfill functions of assets or company shares.

These are often referred to as ‘security tokens’ and they should be considered as something of an investment contract. They are considerably more difficult to regulate and, as of late, have been subject to great scrutiny and critique.

Furthermore, roughly 98% of ICOs launched are considered to be security tokens. This metric is exacerbated by the fact that the the United States Securities and Exchange Commission (AKA the ‘SEC’) has been heavily investigating ICOs of late.

Furthermore, their chairman Jay Clayton appears to believe that every ICO he has seen is a security, remarking that he wants:

“to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story.”

The Benefits of Security Tokens

There are many primary and secondary uses to security tokens.

The most prominent is to provide an opportunity to contributors for investing in various projects, with the expectation of future profits. These may be delivered via dividends, revenue share or, most commonly: price appreciation.

Secondary trading (as well as liquidity) is vastly diminished as well for security tokens as this ruling could limit or damage the platform, ecosystem and network they are built upon.

Additionally, for coins that fall within the ‘securities’ classification: there are heightened legal risks, duties and obligations that the issuer must consider.

Market, Industry & Regulator Challenges

Source: Cryptocompare

Many believe that this year’s announcement of regulatory implementation in the US was largely responsible for this years record market crash.This comes alongside news and uncertainty surrounding East and South-East Asian regulation activities.

To this day, we still haven’t managed to recover fully from this drop.

Understanding new and culturally disruptive technologies has infamously been one of the weaker suits of many governments across the world, when compared to industry and this is no different when it comes to cryptocurrencies.

Regulations Worldwide

We have seen how easy it is for countries to make decisions, without fully appreciating the extent of the their consequences.

As such, another problem is that many fear that governments will not implement regulations properly due to this lack of understanding.

From China for example, have implemented an outright ban of security tokens and ICOs. Just across the border, however, they are much more legal as Hong Kong is a ‘crypto haven’ – much like Singapore and Taiwan.

Additional concerns come from the effects which these regulations will have on blockchain as an industry, in addition to public fears of wasting tax-payer funding on failed initiatives.

Is 2018 The Year of the Security Token?

It should be repeated that there are considerable benefits to the security token structure, with far eaching ones coming from ICO operator issue security tokens under regulatory frameworks.

Take Regulation A+, Regulation D, Regulation S and Regulation Crowdfunding. Each of which offers its own respective and far-reaching benefits, and while these security-token frameworks are still strict: they allow for ICOs to be conducted in a cheaper and faster way than utility tokens. They also greatly help to reduce legal risk / liability.

Such regulations are a clear example of a government implemented approach, however there are also blockchain based organisations which are developing their own solutions in parallel.

Regulation in the USA (‘The ‘Howey Test’)

No matter your opinion regarding the the US government’s SEC deciding to rule all ICOs as securities, the authority has clealy shown themselves to be a pro-active proponent in the definition of distinct standards for crypto tokens.

In order to help educate their own domestic investors, the Securities and Exchange Commission created what they call the ‘Howey Test’ which helps to educate investors in determining if paritucular transactions can be classified as “investment contracts”.

It is exists alongside a mock ICO called ‘HoweyCoin’, which Josiah Wilmoth (over at our sister site CCN) deemed:

“a landmark embrace of technological innovation,”

and

“a clever campaign intended to teach investors how to identify ICO scams – and troll the fraudsters who continue to operate them.”

The United States of America is home to a great number of projects, however funding processes crypto investment (such as ICOs) are subject to strict limitations.

A result is that many crowd-sale operators opt to refuse US investors at KYC level.

Industry and Community Solutions (‘MOBU’ and more)

Industry lies on the other side of the coin, with inherent features of blockchain such as decentralized decision making.

Projects such as start-up ‘MOBU’ combine a number of these features with proprietary tools and assets with the hopes of becoming greater than the sum of its parts. The end-goal is meant to be to provide an alternative, yet (potentially) compatible solution to those provided by government authorities / think-tanks.

MOBU is a ‘self-regulating’ platform which facilitates the release of compliant security tokens on the blockchain and, according to the platforms whitepaper, it offers Know-Your-Customer (KYC), Anti-Money Laundering (AML) and SEC approval.

Seemingly, the platform / team (according to their whitepaper) intends to bridge a gap. To close the distance between the cryptocurrency developers seeking to offer security tokens, and actual release of said coins: compliantly, legally and successfully.

Final Thoughts

Considering the real use cases, and ability to denominate value, security tokens could rankle traditional financial markets, with a favourable hybrid model from blockchain projects like the aforementioned.

Even more so when considering the news that Nasdaq has begun incorporating blockchain: into public company listings and via it’s Linq platform!

Featured image courtesy of Shutterstock.