By Rafael Padilla

1. Reinforcing the Utility-Security
Dichotomy in ICO Regulation
Regulatory Developments
Presented by:
Atty. Rafael Padilla
Head of Legal & Compliance, SCI Ventures / Rebittance Inc.
Beach Blockchain Conference
10-11 May 2018

2. AGENDA
1. Introduction
2. General Concepts
3. Recent Developments: Wyoming
4. Gibraltar
5. Israel
6. Switzerland
7. Malta
8. Singapore
9. Philippines
10. No Distinction? Case of Bermuda
11. Takeways

3. 1| INTRODUCTION
• Originally we used to advise that there are different types of
tokens, classified traditionally in two types: utility tokens and
security tokens.
• Around middle of 2017, some regulators and legal experts took
the position that the distinction between utility vs. security tokens
can be blurred by the facts and circumstances surrounding its
issuance.
• Under certain fact patterns, a utility token can be a security or
vice versa, and a security can even subsequently give rise to a
utility token (e.g. Filecoin).
• Most recently, various issuances from different government
authorities (lawmakers and securities regulator) in some
jurisdictions seem to suggest the resurgence of the utility-
security.

4. 2| GENERAL CONCEPTS
SECURITY TOKENS
• Tokens that offer a share of earnings and a percentage of
ownership in an organization are similar to shares of stock. A
fundraising ICO that offers stock-like tokens is analogous to
equity crowdfunding, private placement offerings, or an initial
public offering (IPO).
UTILITY TOKENS
• However, most ICO tokens currently do not offer voting rights,
ownership rights, or rights to a share of future earnings. Instead,
they have utility: they convey rights to access, use, and/or
consume the organization’s service or product

5. 3| RECENT DEVELOPMENTS
WYOMING
WYOMING (U.S.) UTILITY TOKEN EXEMPTION ACT
• In March 2018, the State of Wyoming issued the Utility Token Exemption Act.
• Under the “Open Blockchain Token Exemption”, “a developer or seller of an
open blockchain token shall not be deemed the issuer of a security.”
Conditions:
1. Developer, seller or registered agent files a Notice of Intent with the
Secretary of State.
2. Purpose of the token is for consumptive purpose, which shall only be
exchangeable for, or provided for the receipt of, goods, services or
content, including rights of access to said goods, services or content.
3. Developer or seller of the token do not sell the token to the initial buyer
as a financial investment.
.

6. 3| WYOMING (U.S.)
(continued)
• Re Condition 3: How to determine that the developer or seller did
not sell the token as financial investment?
1. developer or seller did not market the token as a financial
investment; AND
2. At least one of the following is present:
a. Token sold to the initial buyer for a consumptive purpose.
b. token has consumptive purpose that is available at the time of sale
and can be used at or near the time of sale.
c. If token is not yet functional at the time of sale, initial buyer is
prevented from reselling token until the token can be used for
consumptive purpose.
d. developer or seller takes reasonable precautions to prevent buyers
from purchasing the token as a financial investment.
.

7. 4| GIBRALTAR
Token Regulation Policy Document (March 2017)
• Most often, tokens do not qualify as securities under Gibraltar or
EU legislation.
• “In many cases, they represent the advance sale of products that
entitle holders to access future networks or consume future
services. They are akin to mobile phone companies pre-selling
airtime in networks they plan to build using the proceeds of
those airtime sales. As such, these tokens represent commercial
products (albeit reliant on future availability and utility) and are
not caught by existing securities regulation in Gibraltar.”
• “Crowd financing is a perfectly legitimate method of raising
finance as is seeking public subscription for new ventures.”

8. 5| ISRAEL
Israel Securities Authority Press Release (March 2018)
• As a general rule, cryptocurrencies that confer rights similar to
the rights conferred by traditional securities such as shares,
bonds, and participation units, will be deemed securities.
• In contrast, cryptocurrencies that represent rights to product or
service and are acquired solely for the purpose of consumption
and use and not for investment purposes, will not be considered
securities.
• If the token cannot be used when it is issued or if it can be
traded on a secondary market, these may be indications that its
acquisition was made for investment rather than for
consumption purposes.

9. 6| SWITZERLAND
FINMA GUIDANCE FOR ENQUIRIES REGARDING THE REGULATORY FRAMEWORK FOR
INITIAL COIN OFFERINGS (FEB. 2018)
• FINMA Guidance classified tokens into:
1. Payment tokens
2. Utility tokens
3. Asset tokens
4. Security tokens
PAYMENT TOKENS
• Payment tokens are not treated as security tokens.
UTILITY TOKENS
• Utility tokens will not be treated as securities if their sole purpose is to confer digital access
rights to an application or service and if the utility token can actually be used in this way at the
point of issue.
• If a utility token additionally or only has an investment purpose at the point of issue, such
tokens will be treated as securities.

10. 6| SWITZERLAND
(continued)
FINMA Guidance for enquiries regarding the regulatory framework for Initial Coin
Offerings (Feb. 2018)
ASSET TOKENS
• Asset tokens represent assets such as a debt or equity claim on the issuer.
• Tokens which enable physical assets to be traded on the blockchain also fall into
this category.
• Asset tokens are treated as securities.
SECURITY TOKENS
• In the case of the pre-financing and pre-sale phases of an ICO which confer claims
to acquire tokens in the future, these claims will also be treated as securities (i.e. in
the same way as asset tokens) if they are standardised and suitable for mass
standardised trading.

11. 7| MALTA
THE FINANCIAL INSTRUMENT TEST (April 2018)
• The test comprises a three-stage process that would first verify whether a
distributed ledger technology (DLT) asset falls under the category of "virtual
tokens" - effectively what is colloquially known as utility tokens.
Two key features of VTs:
1. Utility, value or application solely within the context of DLT Platform on which it
was issued.
2. Assets are unidirectional in nature, in that their utility, value or application may not
be exchanged for funds on the platform or with the issuer.
• Stage 2 and Stage 3 relate to various securities definitions set by European
financial regulators as applied to crypto assets, including transferable
securities, money market instruments or financial derivatives.

12. 8| SINGAPORE
GUIDE TO DIGITAL TOKEN OFFERINGS (November 2017)
• Offers or issues of digital tokens may be regulated by Monetary
Authority of Singapore (MAS) if the digital tokens are capital
markets products under the Securities and Futures Act (SFA).
Capital markets products include any securities, futures
contracts and contracts or arrangements for purposes of
leveraged foreign exchange trading.
• MAS will examine the structure and characteristics of, including
the rights attached to, a digital token in determining if the digital
token is a type of capital markets products under the SFA

13. 9| PHILIPPINES
SEC ADVISORY ON INITIAL COIN OFFERINGS (January 2018)
“Based on the information gathered by the (SEC), some of these
new virtual currencies, based on the facts and circumstances
surrounding their issuance, follow the nature of a security as
defined by Section 3.1 of the Securities Regulation Code (SRC).”
• SEC is currently in the process of writing a bespoke regulation
for ICOs. While no timeline was given, the regulator hopes to
release the regulation within 2018.

14. 4| NO DISTINCTION?
THE CASE OF BERMUDA
BERMUDA COMPANIES AND LIMITED LIABILITY COMPANY
(INITIAL COIN OFFERING) AMENDMENT ACT 2018
- Colloquially referred to as the “ICO Act”. The bill was approved
last month by the House of Assembly. Once the ICO Act receives
the approval of the Senate and Royal Assent, it will become
operative, which is expected to occur within May 2018.
- The ICO Act applies to all “digital asset” which includes both
utility tokens and security tokens.
- The ICO act requires a Bermuda company offering digital assets
to the public to publish an ICO offer document, regardless od
whether what is offered is a security or utIlity token.

15. 4| TAKEAWAYS
• Pending statutory changes, the local blockchain community
should continue to champion and advocate for a clear
distinction between utility tokens and security tokens.
• To fortify the utility token position, local projects are advised to
focus on building their technology, product or service.
• To avoid blurring the line, local projects conducting an ICO
should exercise restraint from promoting their token as an
investment or from suggesting anything that might imply
expectation of profits on the part of the token buyers.
• For those determined to issue security tokens: we believe
security tokens are the future. But projects should be patient.
They should not rush issuance of security tokens without
ensuring legal and regulatory compliance.

16. Nothing follows.
Thank you.