Originally published in the Legal Executive Institute
by Joseph Raczynski
BOSTON — Recently I moderated a session at Harvard Business School surrounding its first annual Business, Regulation and Technology of Blockchain Conference. It was held in conjunction with the MIT China Innovation & Entrepreneurship Fund and the Harvard Law Entrepreneurship Project’s Blockchain Initiative.
Before a crowd of 175 attendees — comprised mostly of members of the legal and financial cryptocurrency communities, and MBA and law students — the panel focused on the governance of cryptocurrencies in 2018. The panel experts consisted of Kendrick Nguyen, CEO of crowdfunding platform Republic; Caitlin Long, self-described blockchain enthusiast and former Chair and President of Symbiont; and Anil Advani, Managing Partner of Inventus Law.
The Difference between a Utility Token and a Security
In pushing to help people understand the Initial Coin Offering (ICO) market, I posed the most hotly debated question in the crypto community: What is the difference between a Utility Token and a Security?
Advani jumped into the conversation by discussing how Jay Clayton, the Chairman of the Securities and Exchange Commission (SEC), defines the distinction, “If you are running a laundromat it is a utility, but if you are raising capital that is a security.” Advani went on to explain, if the token is designed to serve as a prepaid service, or it allows you to access a company’s service, e.g. a loyalty points system, it is a token. However, if you are simply trying to use an ICO to raise capital, that is a security and hence subject to SEC regulation.
Nguyen agreed, speculating that he “expect to see this space to be litigated in court” and added that he hopes “that a lot more tokens will be determined to be utility tokens rather than securities.”
Long emphasized that it may take some time for regulators to sort this out, but companies need to be cautious in the meantime. “Most of the cryptocurrency platforms are not functional yet,” she noted. “So the token currently is not exchangeable for a good or service until that platform is built.” Therefore, these tokens need to be locked up until the companies are operational and not sold until they are ready, she explained, adding that if a company sold its tokens sold ahead of being functional, those tokens could well could be considered a security.
A Token Can Change its Stripes
As this topic is of paramount interest to a $500 billion cryptocurrency industry, the panelists continued the conversation, noting several recent developments. Long described a recent interaction she had with SEC Chairman Clayton. “A token can change it stripes,” Long mentioned, outlining the two stages of a company’s build. In the first phase, because there is no product the tokens are likely considered Security tokens; however, once the platform is running, and the tokens can be exchanged for goods or services, they could be converted to a Utility Token. The key, Long said, is not to “market it as an investment.”
Finally, one of the points noted by Advani was that “Chairman Clayton’s off-remarks during events are similar to Trumps tweets.” It is creating a lack of clarity in this market, thus leading to confusion and consternation, he said.
Privacy Tokens & Taxes
Some of the cryptocurrencies listed among the 1,600 currently available are completely anonymous. I posed the question about its impact on anti-money laundering (AML) rules and the market. Advani is concerned about the ability to track these sorts of assets and said it raises a deep level of concern about how any government would be able to account for this.
Another question that I presented to the panel was on taxes, prompting Long to respond: “This is clear as mud.” There is very little guidance on how to tax hard forks of a cryptocurrency and mining operations, for example, and Long went on to say that this will require legislation to help understand the various facets of the new tokenized society and tax.
While the panel covered a wide spectrum of the impact of regulation on cryptocurrencies, the primary theme that emerged is that though there are glimmers of definition from various agencies in the United States, considerable guidance is still necessary for people to better understand how to invest, create new companies, and work with cryptocurrency.