Blockchain technology is coming up with a new concept with each passing day. While the blockchain is gaining a lot of traction across various industries, the cryptocurrency market is also introducing new funding mechanisms for the investors.
Consumer Token Offering (CTO) is the trending and new concept in the cryptocurrency market, however, many investors and traders have not heard about it yet. Though the concept of consumer token is not so familiar, predictions circulating this business model say that it would go viral in 2019.
Before CTOs, there were first ICOs (Initial Coin Offerings) and then STOs (Security Token Offerings). ICOs were a significant hit in 2017, but its model was found to be fallacious due to the absence of regulations. STOs replaced ICOs in late 2018, which were compliant with specific regulations.
Moreover, the STO model also brought tokenization of real-world assets. As a result, investors witnessed less volatility and new coins held some stable value. Now, the market has even moved from this model and a new trend, known as “Consumer Token Offerings” has started to emerge.
Let’s discuss what is Consumer Token Offering and why it could rule over ICOs and STOs.
What is Consumer Token Offering?
Consumer Token Offering is a fundraising mechanism, just like ICOs and STOs. It is different from other models in a way that consumer tokens are only sold to consumers who can buy services or a product with that token.
Consumer tokens are neither securities, nor they are designed for trading purpose. Consumer Token is a crypto token similar to a utility token, developed and sold via “consumer token framework” created by the crypto-legal consortium “The Brooklyn Project.”
Patrick Berarducci, Brooklyn Project Co-chair and ConsenSys Deputy General Counsel says:
The bottom line is that these are digital assets that are constitutionally consumptive in nature— meaning, they’re designed fundamentally to be used or consumed.
Also, the founder of ConsenSys, Joseph Lubin, said that the company has planned to launch 4-5 consumer tokens in 2019.
Why Consumer Token Offering?
STOs came as an improvement after ICO scams and various weak projects that never had a future scope. STOs were more regulatory-friendly as one needs to comply with specific regulations to launch a security token.
STOs only allow security tokens to be sold to accredited investors. Therefore, it becomes challenging to sell products to be used by consumers. It does not imply that STOs are bad and they can always be used for limited groups, for example, institutions willing to invest in crypto tokens. Consumer Token Offerings (CTOs) have come as an improved model with the consumptive consumer tokens.
Now, the question is how the regulators might react to it and will CTOs receive acceptance from the US Securities and Exchange Commission or not.
What could be the reaction of regulators on Consumer Token Offerings?
The US SEC believes that cryptocurrencies are securities. It, of course, does not include Ethereum and Bitcoin. However, if you are looking to launch a Consumer Token, you would be curious to understand the regulators’ reaction to this new model.
According to the founder of ConsenSys, Lubin, the US SEC will accept CTOs and he gave his opinion based on SEC Chairman, Jay Clayton’s statement that ETH and BTC are not securities.
Since consumer tokens are properly structured, promoted and have a use case, they cannot be categorized as securities. Consumer token issuers never claim that people who invest in it will see large profits in return.
Instead, investing in consumer token will allow token holders to avail services or product associated with them. For instance, CVL consumer token will allow buyers to read news from the ethical newsroom.
Following are some of the reasons why Consumer Token Offering could get approval from SEC:
- Consumer tokens are specifically designed to be consumed or used.
- Tokens are designed using the consumer token framework developed by ConsenSys baked, The Brooklyn Project.
- Tokens will never be skyrocketed in value.
- Tokens cannot be considered as securities; therefore, there is no need to register in the SEC.
- Tokens cannot be resold as speculative financial elements.
- Token holders can claim service or product with consumer tokens.
Some people might consider consumer tokens as utility tokens, which is not the right statement. It is essential to understand that utility tokens can rise in value anytime and can be sold or bought on the exchange platform. However, consumer tokens are solely designed for consuming services and goods.
Once it is clear that the SEC can approve CTOs, investors will be willing to know how to create or launch a Consumer Token Offering.
How to create a Consumer Token?
Presently, to create a consumer token, one needs to follow the guidelines stated by the consumer token framework of The Brooklyn Project.
The consumer token framework by The Brooklyn Project focuses on the following concepts:
Consumer Token Design
The token should have the characteristics of a consumer token and should be usable.
- Make sure that the token’s features do not include equity-like economic rights, equity ownership or any characteristic of a financial instrument.
- The token should offer or represent the access to content, goods or services and therefore, should be consumptive in nature.
- Ensure the token is usable.
Project Governance and Operation
The Consumer Token Offering (CTO) project should have a transparent and organized governance structure.
- Come up with appropriate governance and organizational structure for the project and examine it periodically for the enhancements.
- Define project aspects that will be “open-source” and/or forkable by anyone.
- Keep a track and offer continuous transparency regarding project progress.
- Determine aspects of the project managed centrally by the project team or other individuals and the aspects controlled in a decentralized way by a network of people.
- Make sure the backgrounds of people involved in the project are accessible and not misinterpreted.
Responsible Token Distribution
Token distribution should be carried out in a fair, transparent and ordered way.
- Make sure that token distribution terms are transparent.
- Remove or minimize the following practices:
- Token distribution to individuals who aim to speculate on the token price, but do not use it.
- Token discounts, bonuses or other preferential terms that provide purchasers with the expectations of a return on the purchase.
- Trading tokens in quantities that exceed the cost.
- Token distribution in quantities exceeding the expected consumption or use of tokens by buyers.
Purpose of Token Distribution
If you want to use token distribution as a fundraising mechanism, its purpose and planned use of proceeds should be transparent.
- Promote improved accountability on any funds raised in a token distribution.
- Trace and provide ongoing transparency regarding the use of funds raised from investors.
Projects should always represent token supply parameters and maintain retained inventory.
- State the rules that will govern inventory or total token supply, for example, how many new tokens can be minted or existing tokens can be burned.
- Define the governance for token inventory retained by all project-related entities.
- Represent the factors that can have an impact on the number of tokens in circulation, for example, transfer restrictions and lockup periods.
- Make sure that governance parameters of token’s inventory can be audited in a production code wherever applicable.
Mitigation of improper trading and conflicts
The project should always attempt to build a level of playing field in secondary markets.
- Examine, manage and mitigate potential conflicts of interest, including self-dealing by project dealers.
- Do not get involved in international conduct to alter the value of the token, i.e., by affecting the number of tokens available for sale, rigging token value or prices on any forum or spreading false information.
Token Security and Safety
Tokens offered should be safe and secure to use and own.
- Adopt effective techniques for the security and safety of the project.
- Make sure that the project has qualified a sufficient third-party audit of all smart contracts.
- Accept security risks inherent in the technology and inform token buyers instantly of any security risks or vulnerability discovered in the technology.
Token marketing should be fair and represent the project and product accurately.
- Ensure promises made about government provisions in whitepapers, websites and blog posts for token buyers are aligned with rules embedded in smart contracts of the project.
- The product advertising should be fair and not mislead token buyers.
- Do not try to promote the token as a financial investment or security unless it’s in full compliance with applicable laws for financial products or securities.
- Do not market the ability of token purchasers to re-trade token for passive profit on secondary markets.
Protecting and Empowering Consumers
The consumer token should empower and protect the token purchasers.
- Implement effective mechanisms for refunding or redressing token purchasers if the project is abandoned or canceled.
- Ensure responsibilities, expectations and applicable restrictions of token purchasers in legally binding documents.
- Adopt effective approaches for token buyers to receive value for contributions to the project.
Compliance with Regulations and Applicable Laws
The project and its related organizations should make the best reasonable efforts to comply with regulations and applicable laws.
- The project should comply with all applicable laws, for example,
- Tax laws
- Securities Regulations
- Data Protection and Privacy Laws
- Truth-in-advertising laws
- State and federal money service business regulations and laws
- Know-your-customer (KYC), financial sanctions and anti-money laundering
Following are the crypto startups that have used Consumer Token Framework to launch CTO (Consumer Token Offering)
It is a blockchain-based journalism network that can build their network by selling consumer tokens to the newsreaders. Token purchasers can get timely news as they have access to the membership token of CIVIL.
FOAM project is an alternative to GPS that prevents false location and can bring advancement across self-driving vehicles.
Consumer Token Offering is still in its nascent stage and people are exploring it to understand if it will be a better alternative to STO or not. At LeewayHertz, we have a team of blockchain experts who are doing in-depth research on Consumer Token Offerings and how it can benefit consumers and business owners.
All information will be kept confidential.
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