Determining the exact definition of “Token” can be a bit complicated. Here’s a very broad but non-universal definition: a Token represents something in its particular ecosystem that can measure value, shares, voting rights, or anything else. A Token is not limited to a specific role, it can play many roles in its native ecosystem.

Before we go any further, however, one issue must be clearly distinguished. The difference between cryptocurrencies and tokens.

Cryptocurrencies, such as Bitcoin, Bitcoin Cash, Ethereum, etc., can be platform-independent and can be used as a form of money outside of their native environment. Basically, these are the “cryptocurrencies” we’re all familiar with.

On the other hand, examples of platforms like OmiseGO and Golem that exist on ethereum as a specific platform we call tokens.

Tokens, which represent assets or utilities owned by a company, are usually given to investors during a public offering called an ICO (initial coin offering).

First, developers publish a limited number of tokens. By keeping the number of tokens limited, ensure that they have value for themselves and give the ICO an achievable goal. Tokens can have a predetermined static price, or they can be increased or decreased depending on crowdfunding.

Trading is the easy part. If someone wants to buy these tokens, they simply send a specified amount of Ether to the crowdfunding address. When the (smart) contract detects that the transaction has been completed, they receive the corresponding number of tokens. Since everything on Ethereum is decentralized, an ICO can be considered a success if its Token holding addresses are well distributed and not heavily held by a physical address.

The recently concluded EOS ICO raised a whopping $4 billion in one year, making it the largest ICO to date.

Moreover, as TechCrunch points out, ICOs have given startups at least 3.5 times more money than Venture Capitals since 2017.

By holding certain tokens, holders can acquire a certain number of rights within their ecosystem. For example, by owning DAO coins, you can have voting rights within the DAO to vote on which projects get funding and which don’t.

It can also act as a paid channel for you to use certain features of a particular system. In Golem, for example, you need to own a GNT (Golem Token) to benefit from a Golem supercomputer.

Can be used as a store of value and can be traded within and outside a given ecosystem.

In 1946, the Supreme Court dealt with a landmark case. The case between the SEC and Howey set the stage for the now infamous Howey Test. This case is about establishing a test to determine whether a particular arrangement involves an investment contract.

To make a long story short, two Florida-based companies are being sued for offering real estate contracts for citrus orchard land. The defendant offered the buyer an option to lease the land they purchased back to the defendant, which the defendant could then use to harvest, grow and sell citrus. Since most of the buyers were not farmers and had no agricultural expertise, they were happy to lease the land back to the defendants.

But the practice was deemed illegal by the SECURITIES and Exchange Commission (SEC), which promptly sued it.

According to the SEC, the defendants broke the law by failing to file a securities registration statement. In investigating the defendant’s leaseback and finding that it was indeed a security, the Supreme Court made a truly landmark decision.

They developed a test to determine whether a deal was an investment contract. If so, it will be required to accept securities registration.

The transaction is called an investment contract if the following conditions are met:

• It’s an investment of money
• Investment joint venture
• Investors expect to profit from the work of promoters or third parties

The word “joint venture” can be explained. However, many federal courts have defined a joint venture as a horizontal enterprise in which investors invest their capital assets in a project.

Although the original Howey Test used the word “money,” later cases expanded it to include investments and assets other than money.

In addition, there is another important consideration when identifying securities. Are the benefits derived from the investment controlled by the investor or completely irrelevant to the investor? If it is not within the investor’s control, the asset is usually declared a security.

So what does this have to do with ICOs and tokens? If the Token meets the above three criteria, it will be considered a security.

All three elements must be met to classify a coin as a security.

After the DAO Token failed the Howey test and was judged to be a security by the SEC, the Howey test and security have become a source of heated debate in the crypto community.

This article, written by Ash Bennington for Coindesk, analyzes why the DAO was judged to be a security in the form of a story:

“Not long ago, a group of developers started working on the DAO.

The DAO developer said:

“There are a lot of decentralized projects that don’t have access to funding because they need money to make money.”

I’ll tell you what, we’ll write code and sell tokens, and in exchange, the people who buy tokens will get some profit (not necessarily money) from those projects.

We will run the code and they will choose the project. These projects will grow and everyone will benefit

“It’s a security,” the SEC said.

The DAO developer said, “No, it’s not. It’s just selling tokens.”

Finally, the SEC said, “This is a security.” – Because of the application of the Howey Test: investments with money, joint ventures, expectations and primarily profit from the efforts of others.

So why are investigations and rulings completed in the first place?

This is actually due to the infamous DAO bug. We’ve covered this in detail before, but here’s an overview:

• There is a loophole in DAO’s smart contract.
• The hacker used that vulnerability to launch a reentrant attack.
• More than $50 million worth of Ethereum was moved.

Since many people invested and didn’t get anything back, the SEC stepped in to protect investors’ interests and treat these tokens as a security.

As Jay Clayton, THE SEC’s CHIEF executive officer, said, “The SEC is studying the impact of distributed ledgers and other innovative technologies and encouraging market participants to work with us. We seek to foster innovative and beneficial ways of raising capital, while ensuring that investors and our markets are protected first and foremost.”

The decision was welcomed with varying degrees in the crypto community:

Brad Garlinghouse, CEO of Ripple,

“Regulators are not going away, nor should they. They have protected generations from fraud (some of which is happening in the ICO market).”

However, Roger Ver, founder of Bitcoin.com, disagreed with the decision,

“The truth is this: a group of strangers in a distant land threatens peaceful people around the world and will use violence if they don’t obey.”

So far, we know what a Token is and what the Howey test is. Then let’s look at the two main categories of tokens.

Since most ICOs are investment opportunities for the companies themselves, most tokens qualify as securities. However, if Tokens do not meet the requirements of the Howey Test, they are classified as Utility Tokens. These tokens only provide products or services to users. Think of them as channel tokens.

As Never Stop Marketing CEO Jeremy Epstein explains, Utility Tokens can:

• Give the holder the right to use the network
• Give holders the right to vote on using the network

Since there is a maximum cap on Token availability, the value of a Token may increase depending on supply and demand.

Anthony Pompliano has done an admirable job of explaining how Security Tokens will be regulated in this post.

According to him, because Security Tokens are subject to federal Security regulations, they are eligible from day one. Therefore, in the United States, Security Tokens need to comply with the following laws:

• Regulation D
• Regulation A+
• Regulation S

The rule would allow issuers to offer SEC-approved securities to non-accredited investors and raise up to $50 million through general fundraising.

Compliance with Regulation A+ offerings may take more time than other options due to the requirements for registered securities. For the same reason, Regulation A+ compliant issuance will also be more expensive than other options.

Because the assets represented by Security Tokens already exist in the “real world,” they act as a bridge between the traditional finance and blockchain worlds. So what exactly are the changes brought about by Security Tokens?

Traditional financial transactions can be expensive because all the fees are associated with middlemen, such as bankers. Security Tokens reduce costs by eliminating the need for middlemen. In the future, smart contracts could also reduce complexity, cost and paper work.

Today’s investment deals are very local.

What does this sentence mean?

Chinese investors find it very difficult to invest in us private companies, and vice versa. So what role does Security Tokens play here?

Using Security Tokens, issuers can promote their products to anyone on the Internet. This openness to free markets helps to raise asset values. In addition, this increased openness will lead to…

In the future, these Security Tokens programs will use smart contracts to automate service provider functions through software. These features are currently provided by participants such as lawyers, who increase the number of potential middlemen involved in the project.

Make it easier to trade in the secondary market of Security Tokens through the licensed Security Tokens trading platform. It is also easier for investors to liquidate Security Tokens.

That being said, not everything is a rainbow. Security Tokens also have some drawbacks.

When the SEC ruled that Bitcoin and Ethereum were not securities, the crypto community breathed a sigh of relief. So far, Security Tokens has a much smaller market share than Utility Tokens, but in 2018, Security Tokens could become huge and quickly accepted by all. The belief is that a lot of capital will flow from Wall Street to Security Tokens, not Utility Tokens.

This shift is happening because Security Tokens are perceived as more secure because of strict regulations.

SPICE Venture Capital founder Carlos Domingo expertly summed up his view on the potential size of the Security Tokens market:

“It is inevitable that Security Tokens will transform currencies in the same way that Bitcoin has, because they provide immediate, fluid economic benefits and rapid income delivery to their owners. Every kind of ownership can be tagged, and it’s a huge potential market of trillions of dollars.”

If you find mistakes in your translation or other areas that need to be improved, welcome to the Gold Digging Translation Project – Blockchain sub-rudder to modify and PR your translation, and you can also get the corresponding reward points. The permanent link to this article at the beginning of this article is the MarkDown link to this article on GitHub.

The Nuggets Translation Project is a community that translates quality Internet technical articles from English sharing articles on nuggets. The content covers Android, iOS, front-end, back-end, blockchain, products, design, artificial intelligence and other fields. If you want to see more high-quality translation, please continue to pay attention to the Translation plan of Digging Gold, the official Weibo, Zhihu column. The Blockchain Branch is the blockchain branch of the Nuggets Translation Project, with the goal of better contributing better blockchain content to the community.