Will All Tokens Be Securities Tokens?
Industry Heavyweights weigh in
Venture Capitalists and blockchain veterans Jeremy Gardner (co-founder of Ausum ventures), Gregory Gilman (co-founder of Science Blockchain), Joey Krug (Chief Investment Officer of Pantera Capital), Sunny Dhillon (Signia Venture Partners), as well as Paul Hastings LLP partner David M. Hernand discussed ICOs at StartEngine’s recent ICO 2.0 Spring Summit in Santa Monica, California.
At this point, many blockchain industry participants believe that self-described utility tokens will be considered securities tokens in the future.
“I think there will still be utility tokens,” Joey Krug, Co-Chief Investment Officer of Pantera Capital and founder of Augur, contended on the panel. “There are some things where it doesn’t make any sense to have a traditional security. An example of this is something like Ethereum or something like Augur. In the case of Augur, for example, if you don’t actively participate, you lose the token. There’s no security in the world where if you don’t vote in board meetings you lose the security.”
Out of the potential businesses that could be created, 95 percent of them will be security tokens and 5 percent or less will be utility tokens, says Mr. Krug.
Mr. Gardner wants to adjust the numbers slightly…
“It’s going to be 99.9% security tokens and .1% are utility and protocol tokens,” he said. “[Utility tokens] have one purpose: to raise undiluted capital.”
Mr. Hernand takes a different stance. “We are going to have utility tokens,” he said on the panel. “We have subway tokens, Chuck E Cheese tokens. Everything is going to go digital. We are going to have tokenized mileage points, tokenized a lot of things that have utility.” A lot of these won’t be securities, he says.
“If we have a system where I have a utility token and am building a new Chuck E Cheese, and I sell $100 dollar worth of tokens to play games, no one’s going to tell me I am selling securities. You will have a tokenized element of an ecosystem or platform. And maybe they will be raising capital with tokenized securities or other means. That is the distinction.”
So, what’s next now that the token age is upon us?
David Hernand has questions about regulations and licenses surrounding trading. “How does it trade?” asks Hernand rhetorically. “And the problem is, at least in the US, if you want it to trade on an exchange, there are questions about what an exchange is. If it’s an exchange that operates like a traditional stock exchange, it has to register as a securities exchange or an ATS with the SEC. There are a number of groups pursuing this but have not yet got that up and running. Some are very close with platforms built and are in testing mode.”
Sunny Dhillon proceeded to touch on the wild west of cryptocurrency “utility token” exchanges and how listings work. “Exchanges take a percentage of the trade,” said Mr. Dhillon. “You have to have a lot of volume and people anxious to be buying and trading your token [to get listed]. There are rumors that if you send a certain amount of bitcoin you can get listed as well.” Mr. Dhillon believes that practice will have to stop as regulation sets in.
“There are only four securities tokens in the world at this point, which means alternative trading systems are making sure they take their time and get everything right,” said Mr. Gilman. “Institutional investors and ATS’ align when there is a market to be made around a number of products. There is not going to be liquidity without offers, and no offers without liquidity.”
Mr. Hernand added: “People refer to it as democratizing capital which is giving entrepreneurs greater access to investors, and allowing investors to perhaps get access to a broader range of deals. But, whether you’re selling securities or crypto, it has to be done carefully. Just because you are using technology to do this in a way that wasn’t facilitated or possible before doesn’t mean you’re free from money laws. So, it has to be done thoughtfully and carefully.”
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Polymath Network (Polymath) is a decentralized platform that makes it easy to create security tokens. The Polymath ST-20 standard embeds regulatory requirements into the tokens themselves, restricting trading to verified participants only. The platform simplifies the complex technical challenges of creating a security token and aims to bring the multi-trillion dollar financial securities market to the blockchain.
