2019 is being seen as the year of the security token. But the reality is that the term “security token” is an overly broad designation which lumps digital assets and digital securities into a single bucket. The problem is the two types aren’t that different in terms of how regulators view them today.
Digital Assets
Digital assets are standard blockchain network tokens or coins that enables access to products or services, with the value of the digital asset derived from usage of the ecosystem of which it is a part.
Securities regulators usually regard digital asset tokens as securities because they often involve purchasers investing money to acquire the token expecting to make profits from the efforts of others who use the purchasers’ funds to develop the network.
However, securities regulators might entertain arguments that, at some point in time, such digital asset tokens are no longer securities.
SEC Director of Corporate Finance, William Hinman, said, “The network on which bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.”
Digital assets don’t represent a share in a company, they may grow in price and provide profits to their owners. Therein lies the gray area whereby the SEC has stated that it’s likely that most tokens are in fact securities and should adhere to applicable regulations.
Digital Securities
It is a tokenized security, is essentially traditional security that has been launched as a blockchain network token. It could represent a share in a corporation, a portion of a note or other debt security, or a fractionalized interest in an underlying asset or bundle of assets (such as real estate, artwork or ETFs). But these digital tokens are plainly intended to be securities and are subject to traditional securities laws.
In the United States, offers and sales of securities must be registered with the SEC or qualify for an exemption, such as Reg D (for private placement offerings generally to accredited investors) and Reg A (sometimes called “mini-IPOs” due to the SEC review process for these offerings), among others.
Similar laws apply in most major commercial jurisdictions around the globe.
Various important benefits are offered by blockchain technology, such as near instantaneous trading and settlement, 24/7 access and liquidity, automated controls for transfer and trade restrictions programmed into the token, direct issuance to a larger investor pool, and more. But accessing these benefits should be done carefully and with the advice of experienced legal and other professionals.
Issuers of digital assets consider retroactively taking steps to meet security regulations in the U.S. and other jurisdictions. In essence, this means digital assets will become digital securities. And we’re back to the idea that while all tokens are not created equal, they may need to follow the same regulatory frameworks.
