Is My Token a Utility or a Security?

And why this matters when launching a crowdsale…

Rocket by Etherparty is the most comprehensive, end-to-end solution in today’s blockchain market.

An important decision early on for all entrepreneurs and business owners eyeing an initial coin offering (ICO) — or token distribution event (TDE) — for their capital raising needs, is the decision of what function the digital token will play in the overall blockchain-facilitated ecosystem.

A token’s function is what determines the extent of regulatory compliance within the jurisdiction in which the token is being generated from or in which the company launching the crowdsale is incorporated.

Take Switzerland for example. The Central European nation, known for its historic tradition around bank secrecy, is one of the most progressive and open regulatory environments in the world when it comes to crowdsales or ICOs.

Swiss finance regulator, the Financial Market Supervisory Authority (FINMA), published new guidelines in February, which stated it will treat some tokens sold during ICOs as securities or “asset tokens.”

According to those same guidelines, FINMA classifies security or “asset tokens” as assets that represent “debt or an equity claim on the issuer.”

FINMA further states: “Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives.”

On another end of the token-function spectrum, according to FINMA, are utility-designated tokens.

These tokens are instruments that only offer holders of said tokens access digitally to an application or service.

However, and duly recognized by the Swiss , there is “no generally recognized classification of ICOs and the tokens that result from them, either in Switzerland or internationally.”

Canada, for example, continues to grapple with the establishment of a national framework.

The Canadian Securities Administrator, which is the country’s capital markets regulator that works in conjunction with the provinces and territories on legislation, launched a regulatory sandbox initiative last year, in February.

The purpose of the initiative is to encourage and promote new businesses and innovation by providing a unified regulatory approach that can apply across the country. This has yet to take firm hold.

Nevertheless, British Columbia and Ontario regulators have assumed a flexible stance with the latter providing oversight exemption on a select number of projects, one of which was Token Funder, Inc.

In B.C., an official notice recently published by the provincial securities commission illustrated a similar sentiment of openness.

The notice stated, “We understand that different regulatory models may help facilitate innovative and novel businesses in different ways. Currently, to provide regulatory certainty and ensure we manage risks to investors we expect to review novel fintech business models before they can operate.”

The B.C. Securities Commission also extended that it was “interested in exploring other options for approving or licensing new innovations,” noting Australia —also very progressive in regard to regulating the cryptocurrency market within its borders — and its 12-month fintech licensing exemption.

The exemption allows various fintech firms to operate freely for a limited time within strict parameters. Ontario has already made use of such similar time-sensitive regulatory parameters.

In the U.S., the Howey Test remains the key litmus test for deciding whether, in the view of the Securities and Exchange Commission, a token can be viewed as a security or utility.

If the former, it means the token will be considered a security and held to all applicable regulations, subject to all the laws and regulations of traditional securities in the U.S. market.

Canada, U.S., Australia, and nations across Asia and Europe are all, from a policy-making perspective, currently in midst of or discussing the strengthening of regulatory frameworks in order to address the emerging crypto-assets marketplace and crowdsales, in particular.

The rhetoric and activity from lawmakers around the world regarding cryptocurrency regulation is certainly a sign of a maturing industry beginning to be accepted into the fold of the status quo.

Even still, without a globally recognized, universal framework, it is vital to consult with a legal team or counsel that specializes in the cryptocurrency space and those jurisdictions in which your ICO will be launched, before proceeding with a crowdsale.

It is also important to understand that where your token will be sold also falls within specific regulatory guidelines and conditions that may or may not be slightly different than the location of your incorporated blockchain company. So in order to be compliant, national or local legislation must also be considered and adhered to.

Rocket by Etherparty is the most comprehensive, end-to-end solution in today’s blockchain market and is a solution that includes everything from development, consultation, marketing support, and more, to assist in all things ICO-related.

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