• J McGlynn and M Bacina

Israel Securities Authority: "utility tokens" are securities


The Israel Securities Authorities has recently declared that as far digital tokens planned to be issued by Iseral tech startup Kirobo are securities and not assets subject to the Israeli Securities Law. The ISA’s decision follows the company’s request for the authority to make an advance ruling on the nature of its planned token issuance, which the company argued was “cryptocurrency...meant to be used only in connection with its services, ...(and) ought to be deemed a Utility Token.”


How the token works


In brief, Kirobo:

develops and operates a technology that allows users to cancel transactions made in digital currency. The company then charges a commission from the user” (which can be) paid in the same currency as the transaction or in the company's cryptocurrency.

It’s on this basis - that the token can be used to access Kirobo’s services, that Kirobo believes their tokens should be treated as a "utility token" and not a security. But the ISA disagrees.


Security Tokens Vs. Utility Tokens


Rejecting the company’s position, the ISA believes the use and functionality of digital currency is what distinguishes a simple "utility token" from a security. They say that while the token may be purchased to use Kirobo's services, users may also choose to purchase for financial purposes, which has seemed to make all the difference. It says:

There is a probability that there will be investors who will purchase the token for financial purposes and out of the expectation that the value will rise which characterizes investments in securities.

In short, the ISA’s logic appears to be that anything which has a probability of being purchased for speculative purposes with an expectation of a rise in value is likely to be a security. This is conceptually problematic given the raft of things which exist which are bought and sold for potentially speculative purposes in the "normal" economy.


Regulators making moves to regulate digital currency


The ISA's stance certainly sounds similar to the one being taken by the U.S. Securities and Exchange Commission (SEC) against Ripple, where the SEC is alleging the blockchain payments company is guilty of conducting a $1.3 billion unregistered securities offering.


Despite the ISA’s ruling two themes emerge:

  1. That the use of the digital currency is pertinent to its classification, that is what is done with the technology, as distinct from the use of the technology per se, is what is important; and,

  2. Financial regulators are still assessing how they should regulate cryptocurrencies like bitcoin and its rivals.