When a token is not a security.

A framework for understanding which tokens fall outside of the Howey test definition of a security.

TLDR: Token is less likely to be a security when: 1) it launches on a fully developed product/protocol/network, 2) token is meant for consumption and use within that product, 3) token value stays the same over time instead of appreciating.

One of the key things federal courts examine when deciding if a token is a security is whether there's a reasonable expectation of future profit to be derived from the efforts of others. Buying a token with the desire to sell it at a higher price later makes the token an investment. Which by default makes it a security.

The more evidence there is that the token is not an investment, the more likely it is to not be a security. Raising money through a token sale to build a product makes that token a security.

Characteristics of tokens that are not securities

While not definitive, all of these contribute to the token not being categorized as a security. The more of these are met, the stronger the evidence that the token is meant to provide utility or be a currency.

  • Token launches on a fully built and functioning product/network/protocol, and can be used immediately for its intended purpose.

  • Token usage (or consumption) is incentivized over holding it as an investment.

  • Some built-in mechanism ensures that token value stays constant or degrades instead of appreciating.

  • Token is designed with the purpose of being used on the network rather than held for speculative growth or further development of the product.

  • Token acts as a currency in a sense that users can immediately pay for goods or services without having to convert it to another token.

  • If it is a currency, token can be stored and exchanged for value at a later time.

  • It's easier and more efficient to pay for the product/network/protocol with its native token than any other token.

  • Token can be purchased in quantities that make sense when you intend to use it rather than invest in it.

  • The value of the token goes up accidentally (either because of the demand for the token or the product on which it's used) and there is no built-in mechanism that contributes to that growth.

It doesn't matter if a token is called a "utility" or a "governance token" when it functions as an investment. Both are made up terms that have no basis in reality.

It is possible to design a token as a currency (when it pays for things), a commodity (when many produce it), or a utility (when it's the most efficient way to participate in a product).

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