Op Ed: Utility Token? Why You’re Still Better Off as a Security
The SEC’s proclamation that ether (ETH) is not a security has sparked some celebration amongst the cryptocurrency community. Regulatory clarity is always a good thing, but ICO operators shouldn’t see this as a reason to put the champagne on ice.
The fact is, ICOs are still better off operating as if they were securities. Even if the case can be made that you’re a utility token, there are still an array of external factors that can upend your legitimacy. Though following the path of least regulatory resistance is more tempting than ever, taking the steps to be overseen as a security, which includes proactive engagement with regulatory bodies, is the wiser move, both for the stability of your business and the viability of the cryptocurrency space.
Before we dive into the reasons why, let’s make one thing clear: the SEC’s view on ETH is correct. It is more akin to a commodity like oil than it is a security.
That said, the SEC’s announcement has its flip side: further clarity on what can be considered a security. While the SEC’s reasoning behind why ETH is a utility can still be loosely interpreted, their instruction for security tokens to register with them is pretty clear-cut.
This brings us to the first reason why going the utility route is less than ideal: regulatory flux. To put it differently, regulators can change their minds. The warm sentiment that has opened the door to utility tokens can grow cold faster than people realize. All it takes is one catastrophic market event to force regulators to tighten the reins. Additionally, the appointment of a new commissioner or a shift in the political climate can send regulatory bodies in a new direction.
Dodd-Frank is a prime example. The arguably draconian, though beneficial, rules were instilled after a major crisis, upending banking as we know it. Less than eight years and one new president later, those rules are starting to be wiped away.
Additionally, the ETH proclamation may seem to excuse many ICOs from SEC oversight. But, if a token is deemed akin to a commodity, does that then encourage the CFTC to step in? How does their view differ from the SEC’s? Instead of seizing on the clarity the SEC has provided, going down the utility token route reintroduces uncertainty — and heightens the risk of being cracked down on later.
If regulatory sentiment does indeed shift, many ICO operators will be tempted to double down on their rebellious stance, arguing that the SEC did not make any formal rules and cannot come after them for issuing non-registered securities. Others will avoid the U.S. altogether when raising capital; this could help an ICO work around the rules now, but it may end up precluding them from operating in the U.S. later, even as a utility token.
Which brings us to our next reason for opting to be governed as a security token: operational stability and strength. In contrast to the disruption that could occur for any token operating under loosely defined regulations, ICOs that have preemptively registered with regulatory bodies will continue to function as usual.
In addition, they stand to be protected if regulators decide to retroactively crack down on tokens. While I do believe in the merit of utility tokens, I also firmly believe there will be a day when the utility argument will fail for many ICOs, whether it be in the court of public opinion or in the court of law.
For registered security tokens, this is a business advantage. If the marketplace is wiped clear of questionably-governed businesses, those that are left standing can seize a larger slice of market share.
Moreover, being overseen as a security allows the flexibility for future business model changes, including the issuance of tokens under more sophisticated structures. The upcoming generation of security token issuances will likely represent equity, preferred shares, dividend streams and more. Instead of crowdfunding for platform creation, these offerings will resemble those that traditional companies undertake, whether to raise capital for further growth or to create real shareholder equity and deliver a return-on-investment for holders. Those companies that grasp onto the “utility” label may end up locking themselves out of this evolved marketplace.
The utility label is a necessary and valid one for the space. But it’s also highly speculative and, again, subject to interpretation. As the cryptocurrency market matures, a day will come where any company looking to be taken seriously by investors will have to register with regulators in some way. Registering as a security isn’t cheap or easy, and it may bring on more oversight than needed. But it is an investment in the future, recognizing that it is the ultimate path to stability, security and growth, both for your company and the cryptocurrency market.
Louis Adimando is the Chief Strategy Officer of The Praetorian Group. He is also a lawyer and a former compliance officer for multiple Wall Street banks.
This is a guest post by Louis Adimando. Views expressed are his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.