Do Utility Tokens Qualify as Securities?

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Whether crypto currencies are covered by German supervisory law is the subject of a multifaceted discussion in jurisprudence. Of particular interest here is the question of whether individual utility tokens are financial instruments. First of all, the classification of utility tokens as securities should be considered. For the sake of completeness it should be mentioned that in principle the classification of cryptotokens as investment funds and investments can also be considered.

The securitisation of a right in a document is in fact not a necessary condition for the classification of a financial product as a security. It is rather sufficient that the owner of the product is recognizable. In the case of cryptotokens, this is easily possible using the blockchain.

The prerequisites for the classification of a token as a security are then (i) its transferability, (ii) its tradability on the financial market or capital market, (iii) the absence of a payment instrument and (iv) the embodiment of rights in the token, namely shareholder rights or claims under the law of obligations or rights comparable to these.

The transferability of every token is undoubtedly present. Tradability on financial or capital markets is also a regular feature, as according to the definition of the supervisory authority, so-called crypto exchanges (or exchange services) are sufficient in this respect. Utility tokens are also regularly not payment instruments.

Embodiment of Rights

Thus, it is usually decisive whether the token in question is an embodiment of rights, in particular rights that are comparable to claims under the law of obligations. The variety of utility tokens prohibits a general evaluation in this respect, as the following examples illustrate. Purely speculative investments are not taken into account.

Suppose someone sets up a blockchain-based game. Each associated token ("PET") is a manifestation of a single pet that can be traded with other players. The value attributed to the right contained in the token is not determined by the condition of the issuer but solely by the demand for PETs on the market. In this sense, this particular token is not comparable to a creditor claim. The issuer is also not needed to keep the game running, since the essential infrastructure, i.e. the blockchain, is decentralized, i.e. distributed among the players. Therefore, a PET is not a security under German law.

Let us now assume that someone has to do a certain set of tasks ("principal"), while someone else is willing to complete these concrete tasks. A Service Provider now offers these parties a platform to enter into a Contract and to execute this Contract with a token ("WORK") issued by the Service Provider for this purpose. WORK essentially embodies the right to access and use the platform, its value is determined by the quality of service of the platform and the advantages it offers over other means of implementing the contract (i.e. specifically the conclusion of a contract with remuneration in euros to be paid via bank accounts). Therefore, the value of WORK is determined by factors relating to the issuer and is therefore comparable to a creditor claim. WORK is therefore a security under German law.

The above examples are extremely simplified, but illustrate that the question of whether a utility token is a security should ultimately be assessed on a case-by-case basis.

The correct assessment of the structure of a token is of paramount importance, as its classification as a security leads to the applicability of a variety of capital market, banking and money laundering rules.