Token is a unit of value issued by a private organization within blockchain system.
Tokens can be used in a few cases:
- Within applications. Application users buy tokens as an internal currency to pay for goods and services within blockchain system.
- For lending. Tokens allow investing fiat (“physical”) money into crypto currency projects with high liquidity indices. According to profitability principle such tokens resemble borrowed bonds; they may be used as a tool for financial transactions, at the same time they guarantee fixed income after a certain period of time.
- For ICO (Initial coin offering). ICO is a way of fund-raising for crypto currency projects. The issuance of tokens allows any person investing funds in any start-up project with the guarantee of getting a share of profit or fee for transactions of all amount of crypto currency circulating within the whole payment system. Unlike conventional IPO, the ownership of blockchain stocks doesn`t give a person the right to manage the company (unless it is discussed specifically).
Financial value of tokens is determined by their current market value which in its turn depends on the level of users` trust to a project: usually startups entering ICO at this stage are secured with nothing but a business idea.
Utility tokens are such kind of tokens that allow their owner buying different services and service items. Utility tokens are used for financing of projects of common infrastructure that couldn`t receive such financing previously.
Security (“investment”) tokens are such kind of tokens that give their owner the right to implement his investment interests. It may be the right to participate in a legal entity, capital, profit, the status of a creditor or a lender, etc.
What makes utility tokens different from security tokens?
U. S. Securities and Exchange Commission (SEC) gave its official assessment of ICO on July 25, 2017. According to the regulator, the rules that are valid for common stocks of companies when they enter the exchange must apply to the tokens. According to the regulator, the rules that are valid for common stocks of companies when they enter an exchange should be applied to the tokens. It means that now all the issuers are subject to registration to be able to issue their virtual securities.
There is the “Howey Test” in U. S.  legislation created by the Supreme Court of the United States for determining whether certain transactions can be qualified as investment activity. The answer is affirmative in case it is determined that investment was made, it was the investment in a joint venture while the receipt of profit is expected mainly as a result of another persons` activity.
Utility tokes that are given by a stratup to his client with the purpose of financing client`s future purchases don`t serve as securities (security tokens) as their primary goal is to make the process of purchasing easier but not to gain profit. Legal status of utility and security tokens has not been determined in Russian legal practice yet.
Issuing user tokens
Virtual tokens as a crowdfunding tool were originally created to provide an opportunity to issue their own tokens to all the users of blockchain networks.
Platforms for the issuance of user tokens
First platform used for the issuance of user tokens was Ethereum crypto currency platform. It is a decentralized virtual machine which transaction is based on Smart contracts using Proof-of-work (PoW) method.
Users can also issue their tokens using such crypto currency platforms as Waves Platform, NEM, Nxt and EOS. All of them have their pros and cons but, in general, they all are proven tools for the issuance of user tokens.
Risks for users issuing tokens
Since ICO tools are not yet fully regulated, people who buy tokens take most of the risks as in most cases they are only secured with an attractive business idea and potential profit.
However the issue of crypto currency assets security concerns the issuer himself. Here is the brightest example – the story of The DAO venture capital fund that was established at the beginning of 2016 and shut down before the end of the year.
The DAO was raising funds by selling its tokens as a part of its crowdfunding project. As a result it managed to raise crypto currency funds up to U. S. $152 million. After ICO hackers stole about one third of all the assets of the fund. Although sanctions will not be applied to the owners of the fund, the precedent itself caused the decision of U. S. Securities and Exchange Commission to consider tokens issued by the fund as securities and all transactions with them should be subject to registration.
Prospects and predictions
After the decision made by the U. S. Securities and Exchange Commission many American exchanges began to limit the purchase of certain types of tokens for their users that may present certain risk in the light of new legal norms.
In this regard, experts advise non-residents of America to issue utility tokens, without involving security tokens if possible. Otherwise, trading on American exchanges, they will automatically fall within the jurisdiction of the USA, which may cause undesirable effect.
The issuance of security tokens should be associated with official registration and execution of all U. S. Regulatory requirements for safe and legal cooperation with American investors in the area of blockchain technologies.