So, you’re thinking of jumping into the cryptoeconomy. Hold your horses for a minute — or 5 — and read this.
If the beguiling blockchain buzz has piqued your interest, it’s easy to get excited about the myriad possibilities of this game-changing technology. And so, you dive into the all-knowing internet to hone your knowledge and discover your next big passion. And then — chaos.
Headlines announce ICOs. Others divulge warnings about ICOs. You stumble on sparkly new websites where companies herald their SAFT launches, explaining how their infant token or coin will change the world. Are they just black holes for the dollars of investors and blockchain newbies (and even some veterans)? Or are they gold mines on the route of the blockchain train as it blazes new trails into the land of problem-solving and progress?
Before you take a leap in the dark, let me explain what some of these crypto words mean, and what they may mean for you.
In the blockchain media, tokens and coins are often used synonymously, but synonyms they are not. There are technical differences in how they function.
Coin is a pretty easy word to understand. In the cryptoeconomy, coin means “money.” A coin is a store of value and a medium of exchange and they have dedicated blockchains. Bitcoin and Litecoin are familiar examples. There are other coins that are programmed to be money but behave a little differently, such as Monero and Dash. The point of a coin is that you can use it as money but it has no additional function (although there’s nothing to stop developers adding such functionality.)
Tokens are similar because they can serve as money, but the money is also used to pay for specific blockchain services based on an underlying asset or business activity. For example, you can earn Steem by participating in social media and use SIAcoin to pay to store data.
Now, if you are about to complain that SIAcoin has “coin” in its name, I’m afraid that’s just a marketing thing.
There are (currently) two common classifications for tokens, and those classifications determine how regulators treat them.
Utility tokens are issued for use in a company’s application or platform and aren’t intended to be investments. They serve the purpose of being exchanged for whatever service the company will be offering. If you meet someone who tells you they’ve done very well investing in a whole swathe of tokens, that may be so. But, legally, a token is not a security, so, legally, it’s not an investment, even if it does increase in value over time.
Security tokens, legally, are shares in the company that issued them and are considered investments. Investors generally expect to make a profit on their investment, and that changes things dramatically. Much about determining if a token is a security is (currently) based on the Howey test, explained here.
How are all of these blockchain-based companies raising money or rewarding investors? Almost in the same way that non-blockchain startups raise money and reward investors — but not quite.
ICOs are initial coin offerings. Similar to the familiar initial public offerings of stock, ICOs are generally opened with a limited number of coins or utility tokens already valued and available for distribution at the time the ICO begins. And if you’re going to complain that an ICO (Initial Coin Offering) for a token is still called an ICO (not an ITO), we’re with you. In US jurisdictions, tokens have to be usable at the end of the ICO, otherwise, you are selling a security.
SAFTs are simple agreement for future tokens. And this is where things get a little tricky. SAFTs are investment contracts. Accredited investors are helping to fund development of an application or platform, including utility tokens. SAFTs are, more succinctly, a pre-sale of tokens not yet in existence – i.e. not yet usable. A more detailed explanation is available here.
So, why the differing fundraising strategies and concern with regulations?
The cryptoeconomy is bubbling over with both innovative applications and opportunity for capital gains, but regulatory conformity and compliance is probably required for general acceptance and adoption. The development of a uniform framework for fundraising, based on current guidance offered by the U.S. Securities and Exchange Commission, is a bridge that has been built to ease investor concerns.
With the complexities of traditional investment in front of cryptopreneurs as a cautionary tale, along with the accepted idea that compliance with regulation presents legitimacy to investors and adopters, standards for blockchain investments is just the next hill for the cryptoeconomy to crest on its way to mainstream acceptance.