Gu Yanxi: The token economic model must operate under the premise of compliance


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I recently saw an entrepreneurial project using a token economic model. Unfortunately, the application of this project to the token economic model is still not operating under the premise of compliance. Therefore, such a project, no matter which regulatory jurisdiction it is established in, will violate the relevant local laws and regulations.

At present, on a global scale, some regulatory jurisdictions have very clear definitions of token types. For example, the United States divides tokens into security tokens and tool tokens. If a token is recognized as a security token, then it must be operated in accordance with US securities regulations. In Singapore, tokens are divided into payment tokens, security tokens and tool tokens. If a token is recognized as a security token, then it also needs to operate in the same way as a security. Otherwise it is a violation.

However, in the aforementioned entrepreneurial project, one of the tokens is used as a voucher for the distribution of income. It is held by different groups including users, and part of the funds is obtained through sales. This token is also Circulation transactions will be carried out in the secondary market, and the purchaser of the pass is obviously buying the pass as an investment tool. These characteristics clearly indicate that this token is a security token. However, according to the description of this project, the operation of this pass has not been approved by local supervision, and it has not been operated in accordance with the issuance and circulation of securities. Of course, it has not met the various requirements required for securities issuance. Therefore, the nature of this project’s violation of securities laws and regulations is very obvious.

The vast majority of projects in the market that use the token economic model are illegal. However, the token economic model can operate under the premise of compliance.

A major difference between the token economic model and the traditional stock model is that it includes users in the incentive group from the beginning. In the mainstream securities model, the stock holders are the management team and investors. But in the token economic model, the holders of the token include not only the management team and investors, but also potential users. Within the current securities regulations, a startup company can allocate its stock to its investors and management team at the beginning. But almost no part of the stock is reserved for purchasing users from the beginning. In a few cases, some companies only start to allocate part of the stock purchase rights to retail users in a special way at a certain stage of development, that is, at a certain financing stage. For example, when PayPal was IPO, it allocated part of its stock purchase rights to its long-term loyal users. But the purpose of the pass model is to encourage users to directly purchase and recommend its services to obtain some rights and interests of the company or ecology when the company starts to provide products. In the early days of the emergence of the token economic model, such security tokens were sold in the entire market at the beginning of their issuance, which naturally violated securities regulations. Later, the project party adopted the airdrop method for distribution. Although this method avoids public fundraising, it is still essentially a security product. Therefore, the US SEC has also made it clear that although some projects have adopted free airdrops, such tokens may still be securities-type products, and their operation methods may also violate regulations.

Compared with the traditional stock model, the token economic model has no advantage in motivating investors and management teams. Its main function is to motivate users. In this respect, the function of a token is similar to points. But one of the biggest differences between tokens and points should be the difference in exchange value. The convertible value of points can be directly expressed quantitatively in currency, but the incentive obtained based on the token should be a value other than currency. In the Bitcoin system, Bitcoin itself is the value of exchange. In the application of conventional token economic model, the value of exchange based on token should be recognized by users, and it is the value that cannot be exchanged for points. For example, limited edition sneakers, star meet-and-greets, movie stars or celebrity signature souvenirs, etc. The holder of the token can obtain these privileges, but the token itself cannot be traded and circulated like stocks. Such a pass application can also achieve the purpose of motivating users, and it can be carried out under the premise of compliance.

For the users of the token economic model, the function of the token economic model is to encourage users to purchase products. But in the end, the product itself determines its popularity in the market. If the product itself does not have differentiated characteristics and cannot meet a clear demand in the market, no matter how the design and operation of the token economic model are, it will not be able to promote the success of the product in the market.