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Nowadays, the question on everybody’s lips is, "How can a cryptoasset be sold as a security & then resold in a different form?". Basically, a cryptoasset provide its owner with a number of rights which entitle them to certain financial benefits. It can be sold & exchanged for goods or services created within a network where it has been issued (providing, of course, their issuer is authorized to engage in operations with cryptoassets). However, such an explanation falls far short of providing a full understanding of cryptoassets. So, what are they really all about? 


Instead of offering shares (or any other securities), companies seeking to raise funds for expansion of their business can sell the so-called "tokens". It’s worth pointing out that such tokens have the same economic value as any other security; hence, the more tokens are sold (e.g by launching a cryptocurrency exchange in the EU or elsewhere in the world), the more money their seller will be able to raize. After the value of the enterprise has increased, investors can expect an increase in the value of tokens, which can then be resold in the secondary market.

The Howey test may prove to be quite helpful. What it does is matches the amount of money contributed to a project against expected profits. Basically, it asks 3 main questions:

  • Is there a fact of investment?
  • Who determines the fate of an investment (an investor or other people)?
  • Is profit expected from other people's work?

The form of investment is disregarded, while the main emphasis is placed on content & economic value of conducting a cryptocurrency transaction.

Regulation of Crypto Assets

Depending on a sale method, a token can be classified as a security. Therefore, regulation of cryptoasset issuers obviously makes sense. Meant to minimize asymmetries in the exchange of information between token issuers & investors, the Securities Act clearly states what information the issuer must provide the investor with to let the latter make an informed decision. Basically, it facilitates the disclosure of reference information & ensures the safety of the investor by informing them of potential risks associated with purchasing a crypto token in the EU. It also makes the issuer responsible for misrepresenting the provided information.

A method of sale, which defines a digital asset as a security, also indicates when a particular asset may not fall under the definition of a security or investment. If a network in which a token has been created is sufficiently decentralized, a token may not be regarded as an investment contract. The more the network acquires the characteristics of a decentralized network, the more difficult it becomes to identify an issuer & get them to disclose information about their token.


The best example of a decentralized cryptocurrency is, of course, Bitcoin. Bitcoin was decentralized immediately after its inception; therefore, applying the Securities Act to it won’t be making any sense. It should be noted, though, that a cryptoasset's definition isn’t static & can adapt to the volatile patterns invented by individuals seeking to use other people's money for a profit.


Using the name ‘utility token’ doesn’t help distinguish an asset from a security.

According to the Supreme Court’s ruling, acquiring a crypto asset only for consumption cannot be considered a security. However, the nature of a transaction must be determined at the time of analysis and not by affixing labels or titles.

Factors Helping Determine a Digital Asset as a Security

To begin with, you need to determine whether a 3rd party can expect to get a profit from purchasing cryptoassets in the EU or US. The following questions can be quite helpful:

  • Is there a person (or a group of people) who has invested in the creation & promotion of a digital asset (CA)? Do their efforts play an important role in the vitality and value of the asset?
  • Has this person (group) retained their interests or share in the target audience sufficient to motivate them to take care of increasing an asset’s value? Is there an expectation on the part of buyers (investors) that such efforts will be made?
  • Was the amount of funds collected objectively exceeds the amount required to launch a cryptocurrency exchange in the EU or US? If the answer is yes, did the issuer tell you what the balance will be spent on? Are they continuing to spend funds on improving the viability & value of the network in which the tokens operate?
  • Are buyers looking for value? To whom are tokens sold?
  • Does it make sense to apply the Securities Act? Are there people or organizations that play a key role in maintaining the project’s viability? Does it make sense for investors to get the issuers to disclose their plans? Is there an information asymmetry between the issuers & their target audience?
  • What other people or organizations are influencing the project?

The factors described above are important; however, there are also contractual methods for structuring a target audience. Besides, you should always take into account the economic side of conducting a crypto asset transaction, keeping in mind all possible nuances.

Factors Helping Determine a Digital Asset as a Non-Security

The following list of factors is by far not an exhaustive one. In fact, not all of them help immediately determine whether a token isn’t a security:

  • Is the issuing of a token necessary to meet user interests/needs or is it created for speculative purposes?
  • Who sets the value of the token? Does its issuer influence the price of the token in the secondary market?
  • Is it obvious that the buyers purchase a token solely for their personal interests, and not as an investment?
  • How are tokens distributed? Can they be stored or transferred in quantities that meet the buyer's expectations? Are there incentives for the buyer to keep or sell the token for a certain period of time?
  • Who are assets intended for: potential buyers or the general public?
  • How are assets distributed: among the general public or a narrow circle of individuals?
  • Is the system up and running, or is it under development?


To sum up, if the system in which a crypto asset has been created is sufficiently decentralized, it can subsequently be resold in a different form. 

If you need legal assistance with launching an ICO in Europe or obtaining a cryptocurrency exchange license in the EU or US, your safest bet ist to contact IQ Decision UK. Our legal experts will be happy to give you a hand with any legal challenges you might be facing in that regard.