28 July 2022 |

FTT Expert Stevie Kar: Why Most Crypto Tokens Are Securities


Super excited for this guest post from FTT Expert Stevie Kar on crypto tokens and why most of them are securities. I’ve been begging her to write this for a few months now—Stevie’s not only one of the smartest people I know but is also an expert in crypto regulation and compliance. Part of her role as co-GP at Vol. 1 Ventures includes working as a general counsel at some of our portfolio companies, which gives her and the fund a unique insight into these sort of complex regulatory and compliance issues crypto companies face regularly. Super lucky and excited for her to publish her perspective on Fintech Today.

A lot of important news has dropped over the past few weeks surrounding cryptocurrency regulations. Some of these stories made big waves and others barely registered on most folks’ radars. 

The biggest story seems to be the arrest of a Coinbase employee for insider trading surrounding nine tokens (AMP, RLY, DDX, XYO, RGT, POWR, DFX, KROM, and LCX) listed on the exchange. Critics have long noticed hints of insider trading (because, ya know…everyone can see your transactions…) so the amount of shock that this case caused has been somewhat laughable in my opinion. But throwing humor aside, this case has reignited an important foundational argument: Are tokens securities or commodities?

Currently, the Howey test is the legal standard for this determination. Under Howey case law, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Now, with that test in mind, I’m going to say something now that some people won’t like, but they need to hear. Whether investors and founders like it or not, most tokens will be deemed securities. There are cases where they are not securities, but that is in fact, not the norm. That’s because many tokens have been built upon a cut and paste template where founders replicated what another project did and utilized the same arguments, irrespective of whether it applied to their entity structure and governance system. Additionally, when you copy the work of something that is wrong from the start, unfortunately your work doesn’t all of the sudden become correct. So, now what we end up with is a lot of tokens that probably are securities existing in the crypto ecosystem. These tokens are holding themselves out as commodities and inspiring new founders in the space to use their exact frameworks. 

To compound this problem we have a lot of investors and lawyers giving unequivocally bad advice to founders. Based on my work as General Counsel for some portfolio companies of ours at Vol. 1 Ventures, I can tell you firsthand that it is VERY hard to create the proper entity and governance structure for a decentralized asset that isn’t a security. Without a legal team that closely works together on all aspects of a project’s regulatory framework, you can end up with a piecemeal disaster. This is painstaking work that will take over your life, so I understand why folks go straight to the easy button but again, easy is most likely wrong when you’re dealing with these types of assets. 

Finally, it’s become quite popular to trash on the SEC in cryptocurrency circles these days. I’m all for the proper criticism of our government agencies, and usually would join the chorus (trust me, as the owner of a dairy farm, I have raaaants about the Food and Drug Administration), but here the criticism seems to be solely for the purpose of propaganda. The SEC is not wrong in trying to protect retail investors. In fact, it’s pretty much their main job. If it wasn’t their job our economy would be in tatters from rug pulls, on all financial fronts. We would also not enjoy many of the financial freedoms that we have in the United States to build new and unique products that have the potential to allow generational wealth to be built. Now, it’s up to the cryptocurrency ecosystem to create projects that are safe and sustainable for all types of investors. 

If you have any questions or comments, feel free to email at [email protected]!