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July 2, 2018   |   By: Max Dilendorf, Esq. and Rika Khurdayan, Esq.

What We Talk About When We Talk About Security Tokens

With the rapid development of the virtual-token market over the last few years, it should come as no surprise that the way in which people talk about virtual tokens is in flux. Some common phrases have come to mean different things to different people. But that fact makes talking about virtual tokens accurately and effectively more difficult and serious misunderstandings too easy.

Because of the risk of misunderstanding, those of us who work in the blockchain field should be more mindful of how we use certain terms in the blockchain context. Toward that end, below are some thoughts on the terms “security token” and “security token offering.” These phrases have the potential to seriously mislead, and so should be used with precision and clarity:

  • Security token means a virtual token that represents ownership of an asset, debt, equity in a business, or profit-sharing right. Investment token is an apt alternative. But the term does not mean any virtual token that qualifies as a security under U.S. law (many utility tokens do, too), or a token sold in compliance with securities regulations (as all tokens should be).
  • Security Token Offering (STO) refers to an initial coin offering (ICO) involving security tokens, not one that complies with securities law. Also, some have suggested that “ICO” should be used only to refer to offerings of utility tokens, but such a distinction would perpetuate the myth that utility tokens are not securities under U.S. law.

In short, we should be careful to clearly draw the distinction between utility tokens and security tokens based on their uses, not their legal status. The former really does distinguish the two types of tokens, but the latter does not.

Blockchain technology is still young, and new terminology that helps us talk about it is inevitable. But in developing and using that terminology, we must think carefully about how well it conveys our meaning and whether it risks sowing confusion among our readers or listeners.

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

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