The Israel Securities Authority is recommending lenient regulations for initial coin offerings, including a clear definition of what separates a so-called "utility token" from a security.
According to the ISA report, a utility token that "confers usage rights in a product or service offered by a specific venture" shouldn't necessarily be deemed a security. Neither should tokens that are used solely for clearing, exchange or payments for a specific project, the report said.
However, a utility token might be a security if the cryptocurrency isn’t controlled by a cohesive party, such as the startup itself, and if it can be used for payments beyond the initial venture.
For example, if someone tried to fundraise for a private company by issuing a new general-purpose cryptocurrency similar to bitcoin, that might be a security token, in the agency's view.
Case by case
In the meantime, the ISA report defined a security or investment token as a cryptocurrency entitling the holder to the future cash flow or "ownership rights, participation, or membership in a specific venture,” according to a translation by the Israeli outlet Globes.
The clearest distinction between a utility token and a security, according to the report, is whether there are options to trade it in a secondary market. Another crucial factor is whether there is an existing platform where people can actually use the tokens. Promising a future platform doesn't guarantee the token was purchased for its utility.
If there’s no working platform or use case, despite trading options, Israeli regulators believe the token was probably purchased as an investment.