INTRODUCTION
Did you know that ICOs raised more startup in Q1 of 2018 than the entire 2017? According to Etherscan over 20,000 token contracts have been written and deployed.
It's a fair observation to say the legality of 'creating virtual currency" wasn't considered.
You see with fiat you can't just wake up and say "Oh, from today I want to spend my own currency called the Kamako" spend a few minutes typing some code and voila... Kamaco (KMC) is born. Sadly, that's pretty much what's been happening with crypto. Apparently, it's that easy.
The thing about money is that if people won't accept it as a form of payment/exchange, then it's not legal tender.
So while we've had many community-backed projects such as Bitcoin, Ethereum and Steem, we've also seen the double-edged sword effect of few minds creating a fictitious project and conning communities or investors into buying in on their pipedreams before taking off with millions in investments.
The lack of regulation is a defining factor of cryptocurrency. After all, a major tenet of cryptocurrency is DECENTRALIZATION. How then can a currency be decentralized if it still has to go through an authority? Compromise may be good, but it negates the entire point of the movement.
What we all agree on is that it is unacceptable for investors to be played for fools. Something must be done to curb bad actors. This is why some countries like China have banned cryptocurrency altogether.
Financial authorities like the SEC and its jurisdictional counterparts worldwide have long taken a stand against the perceived fallacy of some projects offering securities and issued many warnings about regulatory compliance and investor protection legislation. We saw some steps towards compliance like when the Winklevii tried to legitimize their Gemini business and get Bitcoin registered as a tradeable asset.
Many projects started claiming they weren't selling Security tokens (tokens basically attached to monetary value) but were using Utility tokens (tokens that power the ecosystem and are used to activate operations).
However, the regulatory bodies require more than just your word. The crypto world is a mostly anonymous ecosystem and we can't be separate who is truly investing from the person laundering money or financing crime/terrorism.
Also, just because you call a token a utility and throw in a few user case scenarios doesn't mean it cannot be used as a security. Sometimes the use-cases are a long stretch and it's just better to be honest and compliant. The SEC frowns greatly upon those who fraudulently insist on claiming they are utilities and those found guilty are subject to heavy fines and penalties. It's not uncommon to receive an order to return all invested funds to their owners.
INTRODUCTION OF SECURITY TOKENS
"If you can't beat them, join them"
The show must go on, and in the face of unsavory repercussions, some teams have decided to comply with the regulatory bodies. The conditions are however stringent and frankly expensive. The regulatory bodies want things such as a KYC/AML database, accredited investor compliance, and some other intrusive conditions that are not only resource-extensive but also go against the ethics of a decentralized community. Basically, we are now to move from a decentralized ownership of virtual tokens to a registered trading of documented and monitored virtual stock.
The industry is still evolving so we are not quite sure what the ripple effects of this would look like. I, however, imagine holders of the token will have more control and say like shareholders of traditional stock. A prevalent protocol will be Distributed Proof of Stake, but this time investors will get added benefits such as rights to liquidation should the project fail.
Some other benefits of Security Tokens relevant to issuers include:
• online exchanges that provide 24/7 liquidity
• Fractional ownership — attracting a deeper pool of investors in secondary markets
• Faster transaction and settlement times.
• Reduced cost of liquidity — fewer middlemen, lower fees and operating costs.
• Dynamic updates — Security Tokens that are updateable and smart
Source
Another opportunity that Security tokens offer is Cross-Organization Tokens. Good examples are DAOstack and Quibee.
- DAOstack is a Decentralized Autonomous Organization token that will be used to regulate corporate governance.
- Quibee is a brand loyalty token project that will allow organizations reward their loyal customers. Quibee intends to offer a cross-brand service (E.g. you can trade your KFC points to buy a Starbucks coffee).
This means that Security Tokens can be applied to just about any company and not only startups. Tokens can more or less become digital shares of any already established company. It's a slippery slope with both potential good and bad results.
The major advantage of these Security Tokens is that they will come with the transparency and immutable records that the blockchain has to offer. The borderless nature of cryptocurrency will also give corporations exposure to new investor pools and increase liquidity. You can say that Security Tokens offer a better balance and give authorities and regulatory bodies a more legally-compliant product to work with. I'm however skeptical that a centralized record of accredited investors won't undermine the transparency of the entire process.
Should the crypto community embrace the change or fight to preserve the anonymity of the ecosystem?
How would you suggest we combat the bad actors creating imaginary projects and too-good-to-be-true whitepapers to scam investors?
I'd love to read your comments.
