Israeli Regulator Outlines What Makes A Token a Security (Or Not)

The Israel Securities Authority also proposed an ICO sandbox in a recent report now in the hands of the agency's chair, who will decide how to proceed

AccessTimeIconMar 19, 2018 at 8:15 p.m. UTC
Updated Sep 13, 2021 at 7:42 a.m. UTC
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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.

In a report released last week, the regulator even proposed a temporary sandbox, where regulators would allow entrepreneurs to experiment under supervision as the cryptocurrency market evolves.

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.

Many blockchain advocates welcomed the Israeli regulator's stance. Amitay Molko, co-founder of the Jerusalem-based networking group Blockchain JLM, told CoinDesk:

"The Israeli regulators are showing that they are taking this very seriously and fairly. This is the first step in the right direction."

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

The report recommends evaluating new tokens on a case-by-case basis, saying:

"A cryptocurrency shall be considered a security according to the array of circumstances and characteristics of each case, taking into consideration the purpose of the law. Cryptocurrencies conferring rights similar to those of conventional securities, such as shares, bonds, or participation units, shall be considered securities."

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.

The report is now in the hands of ISA chair Anat Guetta, who will decide how to proceed with unique securities regulations for the cryptocurrency space.

The Israeli agency's stance stands in contrast to other regulators, such as the U.S. Securities and Exchange Commission, whose chairman, Jay Clayton, recently said every ICO he's seen was a security.

Israeli shekel image via Shutterstock


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