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  • Writer's pictureP Xenos and M Bacina

Researchers ruminate that most "utility" tokens are probably securities under EU law

A group of academic researchers have published research considering the legal distinction between "utility" tokens and other forms of digital assets. Ultimately, their research suggests the majority of utility tokens constitute "tradable securities" under existing European Union (EU) law.

The researchers include Dmitri Boreiko, Assistant Professor of corporate finance at the Free University of Bolzano-Bozen, Paolo Giudici, Professor of business law also at the Free University of Bolzano-Bozen, and Guido Ferrarini, Emeritus Professor of business law at the University of Genoa.

The group published a paper titled 'Blockchain Startups and Prospectus Regulation', in the European Business Organization Law Review. They explained their findings in greater detail in a blog post published at the Oxford University Faculty of Law Blog.

The research includes a limited definition of utility tokens as a “means of payment for services or products that a team wants to create” and suggests that generally, utility tokens are provided as a means to access a platform and can be spent within its corresponding ecosystem.

However, the researchers claim that in large ecosystems, utility tokens can actually act more like a currency, as users can utilise their utility tokens as a means of payment for particular services.

Utility tokens have historically been tradeable, with many projects pushing hard to have their tokens listed on exchanges. The researchers suggest that this trading ability takes utility tokens into a place where they can be “conceptualized both as a mini-currency and as an investment in a platform”. This is since the tokens combine a payment aspect, a utility component, and an investment all into one instrument. Such a combination has never been seen before, as in traditional finance structures clear boundaries exist between currencies, financial assets, and consumption goods (but nothing strictly stops someone from receiving a financial asset as payment for a service).

The paper considers the use of digital assets to raise capital, particularly through Initial Coin Offerings (ICO) and Initial Exchange Offerings (IEO), and touched on the growing popularity of IEOs in certain regulatory jurisdictions, such as Malaysia. They also contrast these jurisdictions with United States where, the Securities and Exchange Commission (SEC) has issued a formal warning of IEOs constituting securities offerings.

Regardless of the offering used to initially sell utility tokens, the research identified that trading activity of tokens tends to be at its highest during the first six months after an initial sale. The researchers concluded that it is exceedingly difficult to justify an investor’s sole intention of purchasing a utility token for use in one specific ecosystem. Instead, such activity “offers a clear indication” that tokens traded on exchanges are viewed by their purchasers as investment instruments.

European law defines “tradable securities” by considering factors including:

  1. the securities are issued in classes by for-profit-organisations,

  2. they are negotiable on the capital market, they have an investment component, and;

  3. they subsequently expose investors to financial risk.

Utility tokens sold through both ICOs and IEOs, were considered by the researchers to “have all these features”. On that basis, they propose that utility tokens would be subject to existing regulation, such as MiFID II and the Prospectus Regulation (PR), regardless of their utility in a given ecosystem. The researchers' concluded:

Finally, we believe that in any event the key concepts are those of negotiability on capital markets and financial risk involved in the investment component of the asset.

There are no reported cases on the consideration of "utility" tokens in the EU, so published papers and regulatory guidance are important when considering how a token might be classified. It is worth noting that the published position of the Financial Conduct Authority of the UK concerning token sales shows a marked contrast to this paper.


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