Coinvise Tutorials
Coinvise Tutorials
/
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects

Social Tokens and Crypto's Legal Aspects

đź‘‹
This essay is not legal advice and has the primary purpose of educating you on what you should care about when launching a token.
 
Lately, a lot of things have happened with the legislation in the crypto space. As the crypto space grows, more rules need to be voted to secure people in this space. Regulation is coming to Crypto, and in some cases, has long since come.
1/ The 'infrastructure Bill'
There's a bill in the Senate right now about tax reporting and Crypto. The bill, initially, would create tax reporting requirements for brokers, which are defined as "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." The goal is to get crypto exchanges to send info to the IRS so it knows if an American made money trading crypto and can tax it as crypto taxes are sometimes underreported.
But there are several problems with this bill.
Firstly, the current definition is wildly overbroad and captures nearly everyone in Crypto (including miners, stakers, noncustodial wallets, etc..), forcing them all to surveil users in order to comply with tax reporting obligations.
Secondly, it's nearly impossible for brokers to track all the transactions as someone could have bought a token in a platform then transferred it, on the blockchain, to another one. Because you can buy a cryptocurrency from Coinbase, send it to a cold wallet, then send it to BlockFi to earn interest, the "crypto brokers" (Coinbase/BlockFi) lose the ability to track "tax basis" or "cost basis," which is needed.
A bipartisan group of one Democrat & two Republicans put together an amendment fixing the worst issues with the bill. The Wyden-Toomey-Lummis amendment clarifies that certain non-custodial actors like miners & developers aren't covered by the broker rule. But Senator Portman proposed his own competing amendment, co-sponsored by Senator Warner, a Democrat.
Then a new compromise amendment has been offered by Senators Toomey, Lummis, Warner, Portman, and Sinema who tightens the expanded definition of "broker" sufficiently that it would be difficult to argue it covers protocol devs who only write and publish code. It wasn't perfect, but better than the underlying bill.
Unfortunately, in the end, the Senate has voted 69-30 to pass the infrastructure bill with the original crypto tax provision. Next, the bill goes to the House, which is in recess until September 20.
Now that we saw what happened in the crypto ecosystem let's focus on Social Tokens. As a community leader, it's legit to have questions regarding the legal aspects of tokens. Is it legal to create its virtual currency? Can I do what I want with my Tokens? That's what we're going to explore.
2/ Legal Aspects of Social Tokens
Before minting your Token, there are general rules that you should be aware of if you don't want to have problems regarding the Law. First of all, it's essential to know that the SEC is in charge of regulating decentralized projects. The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors. It has a three-part mission: Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation.
The current regulation suggests Tokens should have as a main utility to offer fans new experiences within digital economies, which means they should buy Token in hopes of special perks instead of getting financial rewards. Indeed, a token that delivers promises or implies the possibility of any financial return is much more likely to be a security. For example, a use case that can have problems with the Law could be a Social Token as an ISA (Income Share Agreement). Offering a slice of your future revenue to token holders can be seen as a security, even though it's one of the most exciting use cases. If you want to create a token to share your future earnings with your community, you should be very cautious and ask a lawyer before doing it.
The Supreme Court is saying about Crypto that if a project is raising money selling a token and the buyers are anticipating profit, chances are it will be considered a Security.
Tokens should rather have as a primary utility to incentive communities thanks to non-economic advantages. For example, we could think of Social Advantages, where token holders genuinely do not expect to profit from the tokens and hold them for other reasons such as free access to members-only content, 1:1 call etc.. Even without economic value, your Token can have many social values and unlock new experiences that live in your own economy. A useful token, which means a Token without the sole interest of earning money, is less likely to be a security.
Of course, if a Token has a monetary value, it will be tricky to do so. The Law suggests to any community leader to clarify that financial value is not the primary purpose of a Token and that token holders have access to benefits accessible only for them.
Keeping the total power over the Token distribution with a token minted on a fixed supply will be easier. If a Token is transferable (for example, if it's minted on a Bonding curve or if the Token has Liquidity Pools), the Token's creator won't be able to limit the speculations.
The Supreme Court also warn token creators to be careful with False Advertising Issues. If the Token allows fans to access premium experiences, it's obliged that those benefits are really as "exclusive" as advertised.
Again, the fewer financial rewards involved in your project, the better. Here are some incentives that can be considered as security:
  • Don't allow your token holders to earn a return for holding your Token.
  • Don't promise to pay (directly or indirectly) token holders (for work they could do, for example).
  • Don't allow "Yield farming" or A 'buy-and-burn' models (redirect the revenues or profits to increase the value of the Token).
It's also good to remember that it's essential to have Clear Disclosure of Terms like any other reward or loyalty program. People buying Tokens should clearly understand what they're buying and how they earn and receive rewards.
There is still quite a bit of a grey area around the legal aspects of Social Token. Still, in general, if the sole use of your Token is to raise money and advertise to buyers that they will earn profits, chances are it will be considered a Security by the Supreme Court.
3/ Further ressources
If you’re interested to learn more about the Infrastructure Bill and how it will affect the crypto space, here are great resources to start with:
 
If you’re interested to learn more about the legal aspects of Social Token, here are great resources to start with:
 
If you're looking for peoples and organizations to keep up with the latest legal news in the crypto space, here are great resources to start with:
 
If they didn't before, Washington now understands the crypto community's power, passion, intensity, and dedication. The crypto community plans to continue to fight to keep Crypto in the US. They're trying to force old rules on top of new technology, and it simply won't work. The crypto space needs new information reporting requirements tailored for crypto companies.
Coinvise Tutorials
Coinvise Tutorials
/
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects
Social Tokens and Crypto's Legal Aspects

Social Tokens and Crypto's Legal Aspects

đź‘‹
This essay is not legal advice and has the primary purpose of educating you on what you should care about when launching a token.
 
Lately, a lot of things have happened with the legislation in the crypto space. As the crypto space grows, more rules need to be voted to secure people in this space. Regulation is coming to Crypto, and in some cases, has long since come.
1/ The 'infrastructure Bill'
There's a bill in the Senate right now about tax reporting and Crypto. The bill, initially, would create tax reporting requirements for brokers, which are defined as "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." The goal is to get crypto exchanges to send info to the IRS so it knows if an American made money trading crypto and can tax it as crypto taxes are sometimes underreported.
But there are several problems with this bill.
Firstly, the current definition is wildly overbroad and captures nearly everyone in Crypto (including miners, stakers, noncustodial wallets, etc..), forcing them all to surveil users in order to comply with tax reporting obligations.
Secondly, it's nearly impossible for brokers to track all the transactions as someone could have bought a token in a platform then transferred it, on the blockchain, to another one. Because you can buy a cryptocurrency from Coinbase, send it to a cold wallet, then send it to BlockFi to earn interest, the "crypto brokers" (Coinbase/BlockFi) lose the ability to track "tax basis" or "cost basis," which is needed.
A bipartisan group of one Democrat & two Republicans put together an amendment fixing the worst issues with the bill. The Wyden-Toomey-Lummis amendment clarifies that certain non-custodial actors like miners & developers aren't covered by the broker rule. But Senator Portman proposed his own competing amendment, co-sponsored by Senator Warner, a Democrat.
Then a new compromise amendment has been offered by Senators Toomey, Lummis, Warner, Portman, and Sinema who tightens the expanded definition of "broker" sufficiently that it would be difficult to argue it covers protocol devs who only write and publish code. It wasn't perfect, but better than the underlying bill.
Unfortunately, in the end, the Senate has voted 69-30 to pass the infrastructure bill with the original crypto tax provision. Next, the bill goes to the House, which is in recess until September 20.
Now that we saw what happened in the crypto ecosystem let's focus on Social Tokens. As a community leader, it's legit to have questions regarding the legal aspects of tokens. Is it legal to create its virtual currency? Can I do what I want with my Tokens? That's what we're going to explore.
2/ Legal Aspects of Social Tokens
Before minting your Token, there are general rules that you should be aware of if you don't want to have problems regarding the Law. First of all, it's essential to know that the SEC is in charge of regulating decentralized projects. The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors. It has a three-part mission: Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation.
The current regulation suggests Tokens should have as a main utility to offer fans new experiences within digital economies, which means they should buy Token in hopes of special perks instead of getting financial rewards. Indeed, a token that delivers promises or implies the possibility of any financial return is much more likely to be a security. For example, a use case that can have problems with the Law could be a Social Token as an ISA (Income Share Agreement). Offering a slice of your future revenue to token holders can be seen as a security, even though it's one of the most exciting use cases. If you want to create a token to share your future earnings with your community, you should be very cautious and ask a lawyer before doing it.
The Supreme Court is saying about Crypto that if a project is raising money selling a token and the buyers are anticipating profit, chances are it will be considered a Security.
Tokens should rather have as a primary utility to incentive communities thanks to non-economic advantages. For example, we could think of Social Advantages, where token holders genuinely do not expect to profit from the tokens and hold them for other reasons such as free access to members-only content, 1:1 call etc.. Even without economic value, your Token can have many social values and unlock new experiences that live in your own economy. A useful token, which means a Token without the sole interest of earning money, is less likely to be a security.
Of course, if a Token has a monetary value, it will be tricky to do so. The Law suggests to any community leader to clarify that financial value is not the primary purpose of a Token and that token holders have access to benefits accessible only for them.
Keeping the total power over the Token distribution with a token minted on a fixed supply will be easier. If a Token is transferable (for example, if it's minted on a Bonding curve or if the Token has Liquidity Pools), the Token's creator won't be able to limit the speculations.
The Supreme Court also warn token creators to be careful with False Advertising Issues. If the Token allows fans to access premium experiences, it's obliged that those benefits are really as "exclusive" as advertised.
Again, the fewer financial rewards involved in your project, the better. Here are some incentives that can be considered as security:
  • Don't allow your token holders to earn a return for holding your Token.
  • Don't promise to pay (directly or indirectly) token holders (for work they could do, for example).
  • Don't allow "Yield farming" or A 'buy-and-burn' models (redirect the revenues or profits to increase the value of the Token).
It's also good to remember that it's essential to have Clear Disclosure of Terms like any other reward or loyalty program. People buying Tokens should clearly understand what they're buying and how they earn and receive rewards.
There is still quite a bit of a grey area around the legal aspects of Social Token. Still, in general, if the sole use of your Token is to raise money and advertise to buyers that they will earn profits, chances are it will be considered a Security by the Supreme Court.
3/ Further ressources
If you’re interested to learn more about the Infrastructure Bill and how it will affect the crypto space, here are great resources to start with:
 
If you’re interested to learn more about the legal aspects of Social Token, here are great resources to start with:
 
If you're looking for peoples and organizations to keep up with the latest legal news in the crypto space, here are great resources to start with:
 
If they didn't before, Washington now understands the crypto community's power, passion, intensity, and dedication. The crypto community plans to continue to fight to keep Crypto in the US. They're trying to force old rules on top of new technology, and it simply won't work. The crypto space needs new information reporting requirements tailored for crypto companies.