The Tezos token doesn’t appear to meet the threshold of a security, and isn’t likely to be considered as a security by the SEC.

Taking one of the plethora of new tokens and trying to determine whether the Security and Exchange Commission (SEC) might classify the project as a "security" is always a bit of a guessing game. Regardless, it’s an important issue to determine.

Tezos (XTZ) is a decentralized blockchain that allows formal verification, a technique which uses mathematics to prove the correctness of the code governing transactions. The Tezos blockchain will feature secure applications and smart contracts, while at the same time avoiding some of the shortcomings of similar alternative chains.

Why isn’t Tezos a security?

There is a relatively clear checklist that the SEC uses to determine whether new cryptocurrency and token projects are securities or not. Tezos doesn’t appear to meet the threshold of a security.

Tezos is based on a governed chain, which may set conservative crypto enthusiasts’ alarm bells ringing, but the method in which the chain is governed is key: There's no controlling central authority (which in many people’s eyes would immediately make XTZ tokens a "security"), and Tezos is more akin to how Bitcoin forks without the mess. The chain must move with the majority (just like Bitcoin). This decentralized element is a core reason why it’s likely that the Tezos token isn’t going to be labelled a security by the SEC.

A bit more detail…

There are three elements that, when all are satisfied, make an ICO project a security. All must be satisfied: if two out of the three elements are met, it certainly increases the risk, but it won’t make the project a security. Of course, there are exceptions to this general rule, exceptions where if any one criterion is answered in the affirmative, you’d be looking at a security. An example of one of these hard and fast marks is where an ICO assigns ownership or an equity interest into a legal entity, such as an ICO where the token provides the holder to a stake in an offshore foundation. This would immediately make a project a security, regardless of any other details.

Investment of Money

The first element concerns how the funds are raised. The Tezos token was the biggest ICO sale in history. The token was sold in a crowdsale as an investment for every participant. Nearly every single ICO token shares this trait so it’s no surprise, and alone it doesn’t mean that the Tezos token is a security. It does, however, raise the stakes a little as we move to the next element.

Common Enterprise

This element is in relation to how "finished" the product is before the sale of the token, as well as a few other business orientated characteristics. Tezos was entirely unfinished at the time of the sale, which again doesn’t help its cause, though it’s a very common characteristic of many other ICOs.

Expectation of Profit

A token should have a real purpose, and that purpose should be something other than profit making, according to the SEC. The Tezos token acts in a relatively similar way to Ethereum, in that applications and smart contracts can be built on its chain, which serves a clear utility (other than profit making). Although the token itself allows its holder to participate in the community by way of voting, this alone does not constitute "real functionality" according to the SEC.

What is the verdict?

It’s this final point where it becomes clear that Tezos won’t fit the SEC guidelines as to what constitutes a security  - since all three elements must be met. Tezos has a function other than mere profits: there are many developers keen on moving from Ethereum to Tezos to build their applications since the risk of a fatal fork is reduced.

How does the Tezos token stand up? Relatively well. It might seem as though it passes by the hair of its neck, but that isn’t how this system works. It appears as though all ICO tokens meet element one and as such this element appears as more of a "message" from the SEC rather than a real test to hold a token against. That message seems to be "regulators see what you’re doing."

But it’s not all doom and gloom! Cryptocurrency exchanges should welcome regulation if it means securing the future of the industry. Regulation will also help provide the clarity we need to make the best products and provide the best services. Most exchanges are awaiting more regulatory guidance but a few have begun Tezos trading, confident of the above.

Image from Pixabay.

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Con’s a writer. His education background is law, where he’s published in law journals on the legal issues of crypto-currency. His opinion editorials tend to focus the relationship between people and technology, as well as the societal challenges technology can present. He’s consulted for non-profit privacy and digital rights groups, aiding governmental submissions. His passion is for information security, technology and the intertwining legal issues.

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