All those trading in cryptoassets in the US were taken completely by surprise by the SEC’s recent decision to consider cryptocurrencies securities. But here an important reservation needs to be made - the decision does not cover each and every cryptocurrency.
It does not make each and every cryptoasset out there illicit, either. In fact, what the SEC did was bring clarity to the confusion reigning in the domain of cryptocurrencies by acknowledging the fact that ICOs complying with relevant federal legislation can be considered absolutely legal and valid.
Basically, what the two most important excerpts in the SEC’s report boiled down to was that:
- federal legislation on ICOs is applicable to traditional or decentralized issuers that buy or sell securities in the US, irrespective of whether they are paid for in US dollars or virtual currencies, and notwithstanding the fact that the said securities get distributed traditionally or through DL technology
- a transaction involving securities, be it a sale or purchase of cryptoassets, is liable to be governed by relevant federal legislation if a number of circumstances and facts are taken into consideration.
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What Caused the SEC to React That Way?
Last year saw Ethereum value soar to record heights, prompting both investors and issuers to make the most of the situation.
The former sought to gain as much dividend as they could, while the latter tried to meet that demand by offering half-working or non-working products.
Quite a few fortunes were made and companies that lured investors with promises of easy money simply disappeared without a trace taking all their funds with them. And that caused the SEC to step in.
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Which ICOs Can Qualify as Safe Ones?
Based on the information contained in the SEC’s report, 2 kinds of ICOs can be considered safe enough, namely:
- those registered with the SEC
- those offering product-based, and not investment-based tokens
So, what is the difference between the two?
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Product-Based Tokens vs Investment-Based Tokens
Tokens that require investors to apply very little or no effort at all to gain profit can be referred to as investment-based ones. In other words, their value is derived from the actual trading and can, therefore, be considered ‘passively obtained’.
According to the Debevoise & Plimpton report, a token must possess the so called ‘rights’ to qualify as a non-security.But what constitutes product-based tokens?
These ‘rights’ empower their holders to:
- create or develop certain features (including programmable ones) for systems or engage in the mining of products that are considered part of systems
- gain access to systems
- charge a fee for accessing or licensing systems
- make a contribution in the form of labor or effort
- utilize systems and products thereof
- realize products obtained through the use of systems
- add or delete elements of systems, such as features
Tokens granting the aforementioned rights can, in all likelihood, be considered product-based ones.
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Because CP (or Credit Protocol) tokens allow their buyers to utilize the Credit Protocol, power apps developed upon the CP, or make use of other CP-based apps, CP tokens can be compared to a permanent program license.
Therefore, gaining a new token entitles its holder to a specific number of transactions as per the CP which can then be ‘sublicensed’ to other users on a fee-paying or free-of-charge basis.
What this means is that a CP-based ICO can hardly be referred to as common enterprise. Why? Because those holding tokens can develop apps which can only be used by those who developed them, and not token holders at large.
This is what CP tokens are basically all about.
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So What's All this Fuss About?
Given all the above, CP tokens cannot be deemed securities and can be offered for sale in the USA.
Companies launching an ICO in the US but failing to offer tokens for sale in the US are likely to be compliant with the SEC regulation. What makes CP tokens exclusively product-based tokens is that they can be immediately utilized as per the CP or other CP-based apps. Those holding the tokens can use them in apps which they developed themselves or apps that were developed by other companies.
Of course, there is a likelihood of secondary CPT markets arising or CPT being listed on cryptoexchanges in the future. However, that is not what CPT is all about. Those purchasing CP tokens are helping introduce a new technology, which is why it is hard to say how many tokens it will take to use, market and develop this technology. Therefore, cryptocurrency exchanges will be covering their initial needs, particularly given the fact that the overall number of CP tokens is limited.
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