TLDR: Token is less likely to be a security when: 1) it launches on a fully developed product/protocol/network, 2) token is meant for consumption and use within that product, 3) token value stays the same over time instead of appreciating.
One of the key things federal courts examine when deciding if a token is a security is whether there's a reasonable expectation of future profit to be derived from the efforts of others. Buying a token with the desire to sell it at a higher price later makes the token an investment. Which by default makes it a security.
The more evidence there is that the token is not an investment, the more likely it is to not be a security. Raising money through a token sale to build a product makes that token a security.
Characteristics of tokens that are not securities
While not definitive, all of these contribute to the token not being categorized as a security. The more of these are met, the stronger the evidence that the token is meant to provide utility or be a currency.
Token launches on a fully built and functioning product/network/protocol, and can be used immediately for its intended purpose.
Token usage (or consumption) is incentivized over holding it as an investment.
Some built-in mechanism ensures that token value stays constant or degrades instead of appreciating.
Token is designed with the purpose of being used on the network rather than held for speculative growth or further development of the product.
Token acts as a currency in a sense that users can immediately pay for goods or services without having to convert it to another token.
If it is a currency, token can be stored and exchanged for value at a later time.
It's easier and more efficient to pay for the product/network/protocol with its native token than any other token.
Token can be purchased in quantities that make sense when you intend to use it rather than invest in it.
The value of the token goes up accidentally (either because of the demand for the token or the product on which it's used) and there is no built-in mechanism that contributes to that growth.
It doesn't matter if a token is called a "utility" or a "governance token" when it functions as an investment. Both are made up terms that have no basis in reality.
It is possible to design a token as a currency (when it pays for things), a commodity (when many produce it), or a utility (when it's the most efficient way to participate in a product).
Curious what this channel's consensus is on the legal risks of projects that have a token but can't be easily defined as a security. Ex: A token-gated app that only has value when a broad % of members are actively contributing, but there is no onchain governance and the project relies on a centrally-controlled server.
@jrf any thoughts? :)
does the token only serve as membership credentials in this instance?
It would also represent a claim on a % of the treasury. Early token holders would have a higher claim.
anything that looks like "a claim on a % of the treasury" would very likely be defined as a security under howey happy to chat in detail if you want. i went through all this shit with LBRY
TLDR: only launch a token *after* the product fully works, never to build the product. These might help. https://paragraph.xyz/@thatalexpalmer/what-makes-token-security https://paragraph.xyz/@thatalexpalmer/when-token-is-not-security
Yep that's my plan. I want to have an initial cohort of users before I create the token. Thanks for the links!
Would you say tokens that aren’t securities are almost like digital Chuck E. Cheese tokens?
Had to look those up, but yes, good analogy. Also: - AWS or Azure credits - AMEX, Visa, any credit card points - Starbucks points Essentially, “company native currency that only works inside that company”. Can’t be exchangeable for USD under any circumstances (through a mechanism the company built themselves).
@cojo.eth
Depends on what the token looks like. Does it satisfy the Howey test? If so - and you become large enough to notice - then it could be troublesome. The devil is in the details a bit. But basic rule is if you market something as a way for people to make money, you should be careful.
Thanks - based on the feedback here I'm simplifying what I had in mind, which will also be much easier to build and easier to explain to users. :D
NLA, but when I have reasoned about stuff like this w a few different lawyers, the principle they applied after HOWEY test – to be conservative – was "Could your team technically drain the funds?" Im sure there are approaches to get around that even with central server, but def something to check into
Was part of one of these. You're better off offering an NFT that has rights and privileges built into it over a token. Less headache than a token if architected properly.