Utility Tokens Through a South African Lens
There has been much written about utility tokens and security tokens. A good resource to get up to speed quickly is by BlockGeeks called: Utility Tokens vs Security Tokens: Learn The Difference – Ultimate Guide. And it is the ultimate guide. In the next few paragraphs, I’ll take you through the highlights and give a South African perspective to utility tokens.
Defining Utility Tokens
BlockGeeks define Utility tokens in the following way:
“Because most of the Initial Coin Offerings (ICOs) are investment opportunities in the company itself, most tokens qualify as securities. However, if the token doesn’t qualify according to the Howey test, then it classifies as utility tokens. These tokens simply provide users with a product and/or service. Think of them like gateway tokens.”
BlockGeek further explains that utility tokens perform the following roles:
“They help in building an internal economy within the system. Eg. Civic pays its users to verify identities and create attestations within their blockchain. They can give the holders to take advantage of a network by voting in it. Think of any blockchain that has a proof of stake model. Once you have locked up a stake in the network, you have the power to vote on the network’s overall well-being.”
How Regulators See Utility Tokens
The Inter-governmental FinTech Working Group (IFWG) in its consultation paper on policy proposals for crypto assets understands that crypto assets are a form of innovation that may impact the financial sector of South Africa, but the paper does not go into detail or distinguish between utility or security tokens. There is also no mention of how it will deter, regulate and punish ICO scams either.
More specifically, five crypto asset use cases are mentioned in the consultation paper:
- purchasing and/or selling
- capital raising through initial coin offerings (ICO)
- crypto derivatives and funds
- market provisioning.
When the working group does finally do a deep dive into the third use case on ICOs, only then is it likely for utility and security tokens to be unpacked. The consultation paper focuses on two of the identified crypto asset use cases, namely:
- the purchasing and selling of crypto assets; and
- paying for goods and services using crypto assets (payments)
The South African Reserve Bank (SARB) plays a leading role in the working group. It has existing memberships/relationships with the G20, International Monetary Fund (IMF), Bank of International Settlements (BIS) and Financial Action Task Force (FATF).
South Africa toes the line when it comes to financial regulation as dictated by the G20 (an international forum for the governments and central bank governors from 19 countries and the European Union).
How You Should Look At Utility Tokens
For potential venture capitalists, angel investors or larger financial institutions looking to try to understand which direction South Africa will go on utility coins, they need look no further than what is happening in the United States, United Kingdom, and the European Union.
The Financial Sector Conduct Authority (FSCA) is part of the IFWG and hasn’t come out with any South African specific advice for crypto assets recently.
For scam and consumer protection, the SEC puts it best when it says in a recently published online article on ICOs on its website that “The SEC protects Investors, and expects you to.”
It goes on further to say:
“Gatekeepers and others, including securities lawyers, accountants and consultants, should be guided by the principal motivation for the SEC’s registration, offering process and disclosure requirements: Investor protection and, in particular, the protection of Main Street investors.”
To ignore advice like this will be at your own peril.