Making Crypto Tokens Useful and Fair

A common belief is that “regulatory uncertainty” is causing this issue, with people suggesting that memecoins are the only cryptocurrencies resilient enough to withstand the strict scrutiny of the U.S. Securities and Exchange Commission (SEC). They argue that it’s challenging for crypto developers to initiate innovative projects and issue tokens required for those projects without breaching federal securities laws.

We don’t agree.

We spend a lot of time talking to founders about how to develop a regulatory compliance strategy and prepare for SEC scrutiny when launching new tokens. You might expect two lawyers to address that issue by diving deep into the Howey Test, explaining why a court opinion about apartments in the 1970s means a token isn’t a security, or devising a complex corporate structure that requires a diagram to understand.

Now, let’s shift our attention towards a significant aspect: Strive to become an excellent actor and create desired tools for others.

We recommend founders start by stepping back from the details of the law and answering two questions: how do you make the token useful, and how do you make it fair?

Make the token useful

A useful token is one that people find value in beyond just investing. For instance, certain tokens provide access to blockchain products or services, much like baseball tickets grant entry to a game. Other tokens facilitate decision-making among humans, as seen with governance tokens, or stimulate human work, like base layer infrastructure tokens. Additionally, there are tokens that recognize contributions to the system, whether it’s data or something else valuable, but not considered an investment.

Among various valuable cryptocurrencies, bitcoin stands as the prototype. Bitcoin serves a dual purpose: it functions as a decentralized means of exchange facilitating peer-to-peer transactions globally, and it underpins the security of the Bitcoin blockchain. In essence, without bitcoin (the asset), the Bitcoin network wouldn’t exist. This essential utility is embedded within the design of the Bitcoin protocol, motivating individuals to contribute valuable work through mining.

In a similar fashion, Decentralized Physical Infrastructure Network (DePIN) tokens have demonstrated great utility. DePIN initiatives leverage public blockchains to establish decentralized networks of hardware operators who offer resources like data storage or wireless connectivity. The effectiveness of a DePIN project hinges on motivating global operators to join the network, and tokens are particularly effective in achieving this goal. Unlike conventional payment systems – which can be sluggish, costly, off-chain, and limited by geographical boundaries – tokens enable operators from any part of the world to join the network swiftly and efficiently.

Make the token fair

A primary aim of cryptocurrencies is to establish open, secure, and fair platforms for all users. However, some tokens have faced criticism due to mechanisms like “low supply, high market capitalization” and other problems that advantage insiders over the general public. Nothing can halt the progress of a new token faster than showing preferential treatment to insiders or institutions at the expense of retail holders.

A “fair” token can be understood as one that you would feel good about representing publicly, especially if your project experiences significant success. In other words, if you’re confident that the inner workings of your project could be exposed on the front page of a major newspaper without causing any embarrassment or regret, then it is fair. If not, there may be aspects that require improvement.

A common trap for newly introduced tokens is “decision-making masquerade,” where token developers falsely portray their projects as decentralized, community-led initiatives to gain public favor. However, in reality, they secretly control the project or, even worse, distribute an unfair share of the tokens to insiders rather than the general public (and not just investors).

Avoiding transparency in decentralization efforts can mislead token owners regarding their assets and potentially be considered fraudulent by regulatory bodies or private litigants. It’s essential that every aspect of a project is truthful and transparent. A significant stride towards regulatory compliance could be the establishment of an industry-wide standard for disclosures about projects and their associated tokens. We strongly advise projects to prioritize complete transparency with their community.

In this particular industry, it’s inevitable that successful projects will draw scrutiny from regulators at some point. From day one, founders should anticipate these discussions and establish their operations with honesty and diligence to ensure they are doing what is morally correct. Prioritizing fairness and openness might not be effortless, but the rewards in terms of long-term success will be substantial.

These thoughts will positively impact the industry on both technical and practical levels. However, they don’t serve as a magic solution for achieving “regulatory compliance” as it is commonly perceived. As long as global regulations aren’t fully harmonized, founders must still enlist legal professionals to ensure they adhere to the law, and doing so early in the project’s development is advantageous. Skilled lawyers are valuable collaborators during the token design phase, helping founders steer clear of expensive mistakes that may require even more resources to resolve later on.

Approaching the concept with a focus on ensuring tokens are beneficial and equitable is crucial for our industry’s lasting prosperity.

Please be aware that the opinions shared within this article belong solely to the writer, and may not align with the views of CoinDesk Inc., its stakeholders, or any affiliated entities.