The incident started with a WJS article with information that the SEC and CFTC will release the results on May 7, 2018 to decide whether Ethereum is a form of “security”. However, this is a fake news because the SEC and CFTC do not have any meetings on this day.
What is Utility Token?
Utility Token, also known as utility token, represents your access to a product or service of the company that issued this token, that is, a token used for use in applications or reality. This type of token is not considered an investment, so it is not subject to the provisions of the Securities Law.
An example of a utility token is Filecoin, which raised $257 million by selling tokens to provide users with access to a decentralized cloud storage platform.
What is Security Token?
Security Token is a form of “share” of the company, allowing the holder to receive “dividend”. Therefore, Security Token must comply with the provisions of securities laws.
An example of a Security Token is tZero, the token of the online retailer Overstock. The tZERO tokens are issued under SEC regulations, and Overstock CEO Patrick Byrne has stated that token holders will be entitled to a quarterly dividend derived from the profits of the tZERO platform.
So is Ethereum a Utility Token or a Security Token?
To determine whether a token is a Utility Token or a Security Token, the SEC performs the Howey test, designed in 1946 to recognize whether certain transactions are investment contracts. Projects that sell Security Tokens during the ICO must register the tokens, while those participating in unregistered services may be held liable for violations of securities laws.
Being classified as Security Tokens has the benefit of gaining legitimacy, but is subject to strict regulatory regulations and thus limits on who can invest in them and how they can be redeemed. deal. As a result, the liquidity of such tokens is extremely reduced. Transactions are very limited for Security Tokens – they cannot be freely traded. This restriction can destroy the network impacts and prevent the development of the platform. (what the community is afraid of happening to Ethereum and Ripple)
Utility Tokens are not designed as investments, but that doesn’t mean they don’t bring any returns. They have certain uses within the project and do not represent shares of the company. Utility Tokens may increase in price if the demand for a service or product increases. So, buying the tokens of a project, which solves a real user problem, is constantly being developed and improved, can bring great profits in the future.
Ethereum and Ripple Deny as “Security Token”
Understandably, the founders of Ethereum and Ripple vehemently deny that ETH and XRP are “Security Tokens”. Ethereum and Ripple are the 2nd and 3rd largest cryptocurrencies by market capitalization, after Bitcoin. Being regulated as a Security Token can reduce liquidity (as shown in the analysis) and cause the decentralization of these two platforms to be shaken. In particular, there may be a series of legal troubles related to the fundraising history of these two platforms.
In early May, Ethereum Foundation co-founder Joseph Lubin spoke out about this at a tech conference in New Orleans. Lubin confidently states that there is no concern that Ethereum will be classified as a “Security Token”:
“We have spent a lot of time with lawyers in the US and in other countries, and are very comfortable that it (Ethereum) is not a “Security Token”; it was never a “Security Token” many key regulators understand what Ethereum is.”
Furthermore, Lubin believes that Ethereum does not need to be regulated, because it does not meet the classifications of a “security” at any point.
Cory Johnson, Ripple’s Chief Market Strategist last month also told CNBC “XRP is not a STcurity Token.”