SEC Regulations; Utility Tokens vs Security Tokens

These past few days have seen most cryptocurrency platforms being sued for failing to register under the Securities and Exchange Committee. This issue has become a global issue as platforms like Ripple and Ethereum have been filed against. This issue had raised questions with most people asking if cryptocurrencies should be classed as securities. To ensure that people understand what makes a financial instrument a security, this article will discuss the various characteristics of securities.

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According to a statement that was released by the SEC, it states that any platform what so ever that trades digital assets or tokens that are securities should register under them as mandated by the Federal and State security laws. Also, the statement mentioned that the committee will scrutinize all digital assets trading platforms to see if they are really securities. To identify if a particular digital asset is a platform, the 1946 Supreme Court Howey Test would be used to test the platform. According to the ruling, securities were defined as an investment that is made by an individual in which this particular investor expects a certain profit from the work of others. The SEC focuses on digital currency platforms that were launched through various fundraising programs popularly called Initial Coin Offering or token sales. This committee seeks to track down these platforms that run fraudulent activities and ensure that they register under them if they are to continue their operations.

Let's take a closer look at what securities are and what utility tokens are as well.

For a digital asset to be termed a security, it must derive its value from a tradeable external asset. If the digital platform derives its value from the method mentioned above, then it must be registered with the SEC for regulations and severe penalties would be faced if it refuses. If a particular platform meets all the requirements of the regulatory bodies, then it would be given the potential to create a wide variety of applications and also can issue several tokens that represent the stock of a company.

Utility tokens, on the other hand, is used to represent access to a company's service or product in the future. These tokens are not designed for investments, this feature makes them free from any form of regulation. These utility tokens can be used by these platforms to sell a particular coupon which would give users access to the platform that they are developing. Utility tokens are used for token sales or what is popularly called Initial Coin Offering which was coined from the term "Public Coin Offering".

The ongoing debate and scrutiny to ensure that all digital assets that should be termed securities are done and they immediately register with the SEC to ensure that all their activities are controlled by the body. This scrutiny does not just involve cryptocurrencies, but also exchanges and wallets as well. We will keep our hands crossed to see how this issue is resolved.