Token Functionalities and Their Regulatory Implications
Tokens are used by their issuers to govern and control their business models and help users interact with the platform. However, different token rights, roles or features have different regulatory implications. What are they?
Here is a (very simplified) summary of token functions
| Token Roles and Rights | Categorization | Business Implications | Regulatory Implications |
| Rights to collect fees or participate in profit- sharing | Leaning equity | + Strong business incentive for token holder, because the growth and success of the platform will be reflected in the value of the token.
– This token is interesting for token holders, however, it does not guarantee that token holders will be active users of the platform. |
Need proper registration as a security |
| Token-based affiliation programs, possibly based on multiplier | Leaning loyalty & rewards programs | + Strong incentive for token holders to promote the platform and bring in new users.
– Risk of creating Ponzi-scheme, where aggressive premiums to the early users are paid from contribution of the subsequent users |
Neutral if steer clear of Ponzi-like incentives |
| Payment method on the platform, internal currency. Often combined with access rights to the platform
|
Neutral, possibly leaning loyalty & rewards program | + These tokens technically do not add value to the platform and are not linked to specific incentives, since they are used as a common denominator – for pricing and smart contract execution.
+ Can simplify platform accounting and standardize metrics. + Can be used to secure blockchain operation. |
Neutral |
| Access rights sometimes connected with privacy rights and certain permissions | Neutral, similar to membership fees | +The cost of buying tokens can often be offset towards platform fees, for example. Useful for managing platform pricing, promotions and discounts.
+ Can help differentiation various roles within the platform, enforce certain permissions and privacy features. – Can be viewed as artificial entry barrier. |
Neutral |
| Technical governance rights | Neutral | + Strong incentives for developers and partners, who will be able to influence technical decisions and technical direction of the platform, approve or decline new features.
– May be difficult to reach consensus or reconcile diverging opinions. |
Neutral |
| Non-technical governance rights | Leaning equity | + Some token holders may receive certain rights to vet and approve or reject new partnerships, participate in commercial or pricing decisions.
– May be difficult to reach consensus or reconcile diverging opinions. |
Adds regulatory complexity due to resemblance with shareholder voting rights |
| Token buy-back | Leaning equity | + Positive long-term incentives for token holders | Adds complexity |
| Proof of stake | Leaning loyalty or membership program | + Rights to create and validate blocks, grant permissions, define roles for others – maybe important for tech-savvy partnerships.
-May create a biased environment where it could be difficult to attract non-tech-savvy partners. |
Neutral |
| Maintenance roles (often connected with technical governance rights) | Leaning loyalty or membership program | + Users are rewarded for certain maintenance activities, e.g. mining, computing time, providing storage, making backups for others, witnessing or validating certain events, taking part in dispute resolution, confirming validity of documents or information, providing reviews and ratings, creating specific content, sharing data, creating new products or services. | Neutral |
2 typical categories of token holders and their incentives:
| Proposed Token Incentives | Strategic token holders (sophisticated crypto investors, facilitators, partners of the platform) – limited group with larger holdings and longer-term focus | Small volume token holders, may not be active platform participants, crypto enthusiasts, hype-followers, curiosity-driven |
| Token-based affiliation program to increase the incentives for existing platform participants, must be linked to the activity of the customer they brought over time and limited (e.g. 1-2 years). Must be transparent for all sides (mind some privacy implications). Must be affordable for in order not to create Ponzi effect – for example, if your listing fee on the platform is 10% of the volumes, the affiliate commission can be 0,5%, so that it is not too aggressive. You cannot subsidize the product, otherwise, you create incentives for pump and dump. Be careful – this feature could be in some cases treated as a security-like feature. | Less important for this group, but might be nice to have for this group. | Important for this group, but must be carefully managed in order not to be aggressive and not create incentives for collusion and manipulations. Must never make our service loss making per customer, which is why multiplier effect is not a good idea. |
| Token as a payment method on the platform – neutral factor | Likely to be accepted by recurring users and partners without | If the platform is easy to use the act of purchasing a token should not create too much churn |
| Technical governance rights will empower relevant partners to influence technical decisions and technical direction of the platform, approve or decline new features.
|
Strategically important for some partners, irrelevant for less technically savvy partners. | Not important for this group |
| Maintenance roles (in some cases connected to technical governance rights) will allow platform to reward users for certain maintenance activities, e.g. for witnessing or validating certain events (e.g. validating that someone reached performance targets or may be in breach), taking part in dispute resolution, confirming validity of documents or information, providing reviews and ratings, creating specific content, sharing data, creating new products or services. | Will be a crucial part of remuneration for various facilitators. | Not particularly important for non-active participants and passive holders. |
| Proof of stake – must have this option integrated in the design, but in the beginning it is likely that only the platform will be able to grant permissions and validate transactions. In the future the token issuer may decide to grant further permissions. Should include rights to create and validate blocks, grant permissions, define roles for others. Need to include provisions for dispute resolution in order to be able to manage complicated consensus scenarios.
|
Will be important in the future | Less important for this group |
| Token buyback – complicating factor from the regulatory perspective | Could be important for this group, but unlikely decisive factor | Important for this group |
