A Conceptual Framework for Daos, Dapps, Coins and Tokens: New Trends and Conflicts in Securities Law
54 Pages Posted: 22 Jun 2020
Date Written: May 30, 2020
The article offers a novel approach to the threshold questions on the applicability of securities law to digital assets. The clarity of this framework should be useful to courts, regulators, and market participants. Digital-asset development involves two stages, and securities law is essential only in Stage One.
During Stage One, an identifiable firm-developer undertakes to build a project, launch a platform, and deliver fully functional assets. Except decentralized autonomous organizations, many tokens (or coins) do not confer equity rights with respect to issuers, nor do they trigger fiduciary duties typically associated with equity. These assets default to the alternate category of debt securities and are similar to “bonds.”
Bonds are creatures of contract. Under the terms of “indentures” (whitepapers and other offering materials), issuers may incur distinct long-term obligations to their initial investors and undertake to provide ongoing efforts to contribute to the project success even when assets are fully functional and the platform is decentralized, open source and permissionless. This essentially extends the bond term to maturity.
Bonds are securities. Their continuous existence after fully functional tokens are delivered and platforms launched extends the application of the Supreme Court Howey test. Thus, the federal securities law may apply post-launch and post-asset-delivery, i.e., during the Second Stage of a digital asset project. It also points toward two distinct and separate types of assets – a non-security-token (or coin) and a bond - simultaneously circulating after the project has been deployed and tokens distributed in Stage Two.
Finally, there also two groups of digital asset purchasers: the initial investors who own tokens post-delivery and post-platform-launch and the subsequent token purchasers. They exist concurrently. These two cohorts of market participants have completely divergent expectations concerning the role of the issuer in the operation of the platform and the valuation of digital assets. Only the initial “bondholders” have claims against the issuer in Stage Two.
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