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Section 1: Introduction & Historical Review

Published onAug 10, 2019
Section 1: Introduction & Historical Review

1.1 Necessity for the Work, Regulatory Opacity & Uncertainty

Open permissionless systems’ architecture, functionality and behaviour are radically different to legacy finance structures and there are numerous unanswered questions as to how best to integrate the two, if they are even meaningfully compatible at all. The canonical example of the present day disconnect between traditional finance and crypto-finance is without doubt the explosion in disintermediated early-stage venture fundraising through non-equity cryptographic token issuance known popularly as Initial Coin Offerings (ICOs). Key drivers for this proliferation are combination of a lack of political, legislative and economic clarity at the nation-state level with respect to cryptographic assets (cryptoassets), enabling (regulatory arbitrage) using these nascent “decentralised” technologies [1]. For the purposes of this work cryptoassets are considered to be token-based cryptoeconomic primitives typically issued in trust-minimised distributed environments.

Surrounding these peer-to-peer (P2P) networks and token issuers are a sprawling industry of service providers such as exchanges, public relations advisors, crowdsale consultants, mining operations, crypto-lawyers, wallet hardware and software providers, asset custody services and merchants accepting cryptocurrency which collectively bear resemblance to a wild distributed boomtown facilitated by the borderless nature of the technology enabling sophisticated forms of regulatory arbitrage such as dynamic jurisdiction shopping as well as other less savoury practices. Regulators and lawmakers have yet to converge upon a coherent legal basis upon which to attempt to regulate cryptographic assets, and due to variations between jurisdictions a global game of regulatory arbitrage in extremis has been taking place in numerous locations. Implementing regulation is proving to be far from straightforward, not least because the very act of doing so would likely trigger so-called KYC factional disintegration events as is currently in danger of being experienced in the Tezos ecosystem [2].

Since 2008, the scope of capability for financial technology has broadened significantly. Indeed for value-oriented protocol networks and associated applications of cryptography the landscape has changed unrecognisably. Bitcoin has heralded the instantiation of a new paradigm of open-source, leaderless and permissionless value transfer without rent-seeking intermediaries, giving rise to a realised vision of Friedrich Hayek's Prize in Economic Sciences in Memory of Alfred Nobel winning exploratory swathe encapsulated in “The Denationalisation of Money” [3]. This optimistic future is resplendent with sunny uplands of individual freedom, monetary sovereignty and empowerment at the expense of figuratively or literally bankrupt legacy finance, wealth management and banking institutions. Bitcoin comprises an effectively dispersed leaderless network, inventively combining a series of technological elements taken from applied cryptography and distributed systems. These are chiefly public-key cryptography to secure wallets and transactions through digital signatures, a thermodynamic solution to the double-spend distributed consensus problem incorporating game theoretical elements - proof-of-work (PoW) and Nakamoto Consensus respectively and strengthening of the linked list data architecture. These elements are brought together to create a novel type of pervasive, high-assurance data structure with desirable tamper-resistant characteristics as a basis for the robust implementation of a triple-entry financial ledger possessing formally specified characteristics such as persistence (tamper resistance and / or evidence), liveness (synchronous messaging requirements placing upper bounds on delivery delay) and dynamic availability (nodes can join and leave the network at will). In other words, a so-called “blockchain”, “timechain”, “brickstring” or “timecube” [4].

In the past decade, Bitcoin and related value-oriented protocol networks have proliferated in a manner akin to the Cambrian Explosion, with myriad permutations of Bitcoin's characteristic parameters being varied in order to launch independent but similar networks either with a new genesis block - a codebase fork - or by continuing the Bitcoin network's ledger history upon divergence at some specified point in time - a ledger fork [5]. The same has occurred with cryptocurrency projects built upon novel codebases such as Ethereum, leading to the proliferation of ostensible families of genealogically-related codebase and ledger forks. As with the pre-historic Cambrian Explosion, many of these upstart networks and factions do not appear to be created upon sound foundations and as such their longevity may be particularly influenced by the equivalent of an incoming regulatory Ice Age. This rapid expansion in complexity and diversity of cryptographic assets poses a series of challenges for protocol developers, token issuers, cryptocurrency researchers, legal professionals and lawmakers attempting to navigate nation-state regulation of these items. Due to the borderless nature of the technology in question and many grey areas in the nature, usage and function of these networks and assets, the aforementioned prospect of regulatory arbitrage with multiple mechanisms is being widely leveraged by token issuers, exchange operators and even nation-states attempting to entice digital enterprise to their territory.

Certain countries have moved quickly to increase their attractiveness to those engaging in what has become a dynamic jurisdictional shopping competition with particular cases of note currently including Malta, Singapore, Hong Kong, Vanuatu, Puerto Rico, Mauritius, Panama, Bermuda, Belarus, Georgia and Britain alongside associated Crown territories such as Gibraltar, Isle of Man and the British Virgin Islands.

Indeed Malta has taken to using the epithet “Blockchain Island” to further attract cryptocurrency related industry participants, promising attractive taxation and banking arrangements to many billion-dollar valuation companies which were otherwise itinerantly nation-hopping - with highest profile example being the leading global cryptoasset exchange Binance. The act of facilitating this effective safe harbour for Binance and fellow Asian exchange OKEx had an overnight double-digit impact on the GDP of Malta with the action doubling as a high-visibility signal that Malta was welcoming to businesses struggling with onerous regulatory and compliance requirements in their existing domiciles [6].

1.2 Hybrid Character of Cryptocurrency Networks & Assets, the Complex Provenance & Nature of Decentralisation

With reference to well established classes or types of legacy assets - such as precious metals, stocks, bonds and derivatives - that exhibit fairly clear similarities and differences, cryptoassets appear to be less well-defined by comparison to individual legacy asset classes and may be considered sui generis, without close historical counterparts. They frequently but non-exhaustively exhibit hybridised properties being part commoditised bearer asset, part monetary payments medium and network, with the possibility of commodity-like intrinsic functionality - in the sense of a so-called utility token - or security-like on-chain cashflows from more recent alternative extensions to base protocol blueprints such as masternodes or staking.

A complicating factor is that there may be different regulatory agencies within a jurisdiction that cover specific subsets of financial assets - e.g. in the United States both the Securities & Exchange Commission (SEC) and Commodities & Futures Trading Commission (CFTC) agencies claim primacy over cryptocurrencies and related products - therefore a BTC Futures contract would be regulated in the US by the CFTC whilst a Bitcoin Exchange-Traded Fund (ETF) or an ICO startup might be regulated by the SEC or both SEC and CFTC. This is without even considering overlapping purview with the Financial Crimes Enforcement Network (FINCEN) or other US government agencies. This may well lead to a attention bias or Rorschach test scenario, where regulatory officials with specific remits may be inclined to see specific aspects of cryptoassets as being the leading traits and therefore claim the dominant regulatory purview falls within their domain.

In particular the complex and multi-faceted meaning and provenance of decentralisation is far from trivial to characterise, with its influence and impact on the security-like properties of an asset challenging to elucidate. As a phrase originally coined by de Toqueville as an antonym to the centralisation of state power before and after the French Revolution, a precise definition of the term decentralisation in the technological context would greatly reduce the lack of linguistic precision routinely encountered in the context of tokenised networks and assets [7]. A number of approaches to characterise decentralisation as a meaningful or even quantifiable metric have been made, with varying insights and degrees of success [8, 9]. In the opinion of the author decentralisation is an emergent, non-binary characteristic of P2P distributed networks which is contributed to by an ensemble of factors and is commonly found alongside several other similarly difficult to parametrise characteristics. Examples of these are immutability, defined here as persistence of the canonical transaction set from which the ledger is constructed, permissionlessness which refers to the lack of prevention at the social layer of any network participant from transacting and censorship-resistance, taken here to correspond to the inability of third parties to prevent network participants from transacting using actions at the protocol layer [4].

A helpful framework for the rationalisation of phenomena in cryptocurrency networks is to coarsely consider the entire network and ecosystem as a “stack of layers” as is commonly done with computational networks such as the Open Systems Interconnection model [10]. An example delineation of the cryptocurrency network meta-stack has been proposed by Alsindi & Breen following work by Buterin and this is incorporated in Table 1. [4, 11].

Social / Political

All human decision making and interests arising from the chief stakeholder groups of a network. Typically developers, users, miners, validators and businesses.


Transactions, addresses, tokenised incentives and / or monetary issuance via for example proof-of-work, emergent economic characteristics arising from human and autonomous agents employing a P2P monetary network as a value transfer mechanism. e.g. M1, M2, stock-to-flow, price inelasticity of supply.


Cryptographic primitives, data structures employed, protocol specifications, nodes implementing the network consensus rules and P2P network messaging behaviour.

Logical / Architectural

Is the data itself stored in a highly redundant and / or replicated manner. Does the network rely overly on centralised backbone infrastructure?

Table 1: Facets of Decentralisation

With this conceptual model in mind, it could be said that immutability is an attribute primarily observed at the protocol layer - upon which the monetary layer depends for persistence - and censorship-resistance is primarily observed at the monetary and social / political layers. Similarly, the word decentralisation could be taken to have different meanings when considering the various layers in question. Protocol decentralisation could refer to distribution of nodes and other incentivised stakeholders such as miners and stakers that undertake transactions and / or block creation and validation activities. Monetary decentralisation could be described by the distribution of the supply of the asset, which the Gini coefficient attempts to encapsulate [8]. Social decentralisation could be related to the decision-making (or governance) process of a network, and whether some subset of stakeholder constituents are able to exert undue degrees of explicit or implicit influence over a network's outcomes.

1.3 Legal, Economic & Regulatory Characteristics of Cryptographic & Legacy Assets

It is instructive to revisit historical descriptions and characterisations of legacy asset classes - in this case moneys, commodities and securities - to understand how prior classificatory and ontological approaches developed and how these might be integrated into novel subjective conceptual frameworks such as TokenSpace (see Section 3).

1.3.1 Nature of Money Throughout the Ages

Scholars in the domains of natural philosophy, law and economics have taken varying approaches to the assessment of properties of monetary assets and objects throughout history. Aristotle may be regarded as the first to seriously attempt an informed characterisation of the attributes which a monetary good may exhibit in the 4th century BC, by listing the most crucial properties as durability, fungibility, transportability and intrinsic value [12]. Jevons introduced the notions of three principal functions which a monetary good fulfils in the 19th century AD, characterising them as store of value (SoV), medium of exchange (MoE) and unit of account (UofA) and these definitions are employed often by issuers of cryptographic assets [13]. United States Federal Reserve economist Kocherlakota defined money as memory in 1996 [14], in the sense that money performs a function of providing a structured collective memory which facilitates expedient verification of the canonical state of the record kept in such a system, be they high assurance digital data structures, paper money, commodity money with specie such as gold & silver coins, African glass beads or even giant millstones employed by stone-age Pacific islanders such as the Rai stones on Yap island [15].

As much as 20 years ago, economists at the IMF characterised an ostensible trade-off in the attainable control of economic properties of Central Bank Digital Currencies (CDBCs), which may be thought of as digital currencies not necessarily intended to circulate publically but rather utilised to perform wholesale functions such as inter-bank settlement and clearing. Stone et al. determined that it would not be possible for a central bank to have control of monetary supply issuance, a free-floating exchange rate against other assets and a centrally-controlled interest rate [16]. Similarly, the Triffin dilemma raises the prospect of a perpetual fiscal instability within any nation state that issues a currency which is deemed to the be the global reserve currency of that time and indirectly suggests that the ideal solution would correspond to the Hayekian vision of a global reserve money distinct from state-issued currency [3]. By virtue of a currency becoming the de facto global reserve, other nations are obliged to hold substantial amounts for international trade and settlement. Therefore an enlarged supply of currency is required to satiate foreign demand and trade deficits are the usual consequence, setting up a dissonance between domestic and international economic priorities.

An interesting instance of the multi-faceted nature of moneys can be seen in the changing nature of fiat currencies as they morphed from being fully redeemable for underlying assets such as precious metals to being primarily instruments reflecting the faith in fiscal management of nation-state governments, monetary issuers and / or central banks. Prior to the 16th century, the British currency (Pounds Sterling) was little more than a UofA, being equivalent - first literally and then via redemption - for 454 grams of 92.5% purity silver. As the Crown and later Bank of England loosened this peg, the necessity for the currency to become a SoV itself arose. Indeed since the breaking of this peg, GBP has lost over 99% of its value versus silver, which itself is considered to currently be in the depths of a severe bear market having lost approximately two thirds of its exchange price versus USD since its peak in 2011.

In the months prior to the release of the Bitcoin whitepaper [17], Chung took a novel twin legalistic and post-modern philosophical approach informed by absurdist existential thinker and radical monetary theorist Jean Baudrillard with respect to the nature of money [18]. Chung asserts that Baudrillard's notion of a simulacrum - a simulation or abstracted representation of the real - is useful in understanding the development of what societies adopt and consider as money, given the increasing pace of technological advancements over time [19]. The progression from direct use of commodity moneys of varying quality such as locally rare seashells, glass beads or precious metals to minted coins and gold-backed paper money issued either as proxy for the underlying or as a faith-based instrument backed by governments demonstrated this simulacrisation. The recent development of naïvely digitised paper fiat instruments such as internet banking and payment intermediaries such as PayPal and finally natively digital programmable trust-minimised P2P monetary networks such as Bitcoin lend credence to the notion that as digital technology increasingly pervades all aspects of modern human society, the monetary goods which such a society will accept and use for the exchange of goods and services will also follow a similar trend. It is reasonable to suggest that Bitcoin - and similar cryptocurrency networks - instantiate the most hyperreal monetary simulacrum to date. In Baudrillard's parlance, the realness of Bitcoin may even surpass that of original commodity money bearer assets such as gold and silver.

Related to the above concepts are those of the hardness or goodness of money [20]. In essence, a good or hard money is one which retains its value and usefulness over time, chiefly due to judicious choice of monetary material in question. This may be rationalised in terms of the characteristic of price elasticity of supply [21] which may be thought of as a measure of the marketplace's supply-side response to the increased price of a good. Failed local currencies such as glass beads, fiat currencies and naïvely digitised government moneys differ widely from scare assets such gold and bitcoin in this respect. Glass beads were used in many parts of Africa as a monetary asset as they were locally rare, however European explorers making early expeditions throughout the continent quickly realised the inter-continental opportunities available for exploitation and rapidly inflated the local supply of the beads, acquiring much of the local wealth, engendering human slavery and causing rampant inflation of goods prices as accounted for in the local monetary asset - the so-called Cantillon Effect [22]. Unbacked “fractional reserve" fiat money also exhibits shortcomings here, in that it is trivial for a central issuer to inflate currency supply with or without this necessarily becoming apparent to holders of the currency until inflation arises throughout the wider economy.

Gold has some price elasticity of supply insofar as extractive mining necessitates significant capital resources, environmental distress and capital to realise highly purified metal, however should the price of gold double overnight it is reasonable to suppose that the associated motivations and incentives will facilitate a greater degree of exploration and extraction of the metal, thereby increasing its supply. Bitcoin is ostensibly the most supply-inelastic monetary good observed to date on account of its algorithmically determined disinflationary supply issuance schedule fixed at the genesis of the network with very little prospect for change. Every 144000 blocks (ca. 4 years) the subsidy awarded to a mining participant who solves a cryptographic puzzle halves in amount, having started at 50 bitcoin (BTC) per block and currently comprising 12.5 BTC per block. The issuance schedule is completely independent of any crossrate valuation of BTC in some other unit of account, and therefore the supply is completely inelastic with reference to internal network parameters (block height and number of BTC issued).

There have been numerous discussions that due to the long window of mining difficulty readjustment - which recalibrates the likelihood of a miner finding a valid block to satisfy Bitcoin's consensus rules every 2016 blocks (approximately twice a month) - an advancing BTC-fiat crossrate may incentivise the deployment of further fiat-sequestered computational resource onto the network thereby decreasing the average inter-block issuance times and by extension increasing the effective supply as measured by calendar time rather than internal network time (block height). The long-term average of inter-block time in Bitcoin is approximately 9.5 minutes over 10 years to date, consistent with this notion as the vast majority of difficulty adjustments are increases, reflecting the general trend of increasing computational resource directed to the network. Creator of Bitcoin progenitor Bit Gold Nick Szabo encapsulated this desirable nature of good money as “unforgeable costliness” [23] as regards the asymmetry between the difficulty of asset replication, dilution, reverse-engineering and so on versus facile verification of authenticity. Indeed this takes the notion of price inelasticity of supply to its logical conclusion, especially with reference to natively digital assets for which solving the issues around double-spending are non-trivial.

More recently, work by Gogerty and Johnson has explored Network Capital valuation approaches. By considering all monetary systems as protocols, the notion of potential future transaction networks known as transactomes is proposed as a powerful concept [24]. As such, the transaction graph of a monetary protocol network moves from an objectively known and understood status in the past, to an intersubjective transient state in the present and perceived subjective status in the future. This model may offer an improved perspective of network effects as a monetary protocol expands in scale as compared to Metcalfe's Law [25], proposing that the rate of change of network utility (dN/dt) is a higher quality heuristic than network utility itself (N). Table 2 briefly outlines relevant aspects of this model.

P = Max[R, (N+S)]

where P = Price, R = Redemption utility, N = Network utility, S = Speculative utility


Price is only known at the completion of a transaction, therefore the equation aims to address this uncertainly through the use of the additional terms.

Redemption Utility

Redeeming asset-backed currency for the underlying collateral, consuming / transforming goods such as oil or ether, eating fish or corn.

Network Utility

The expected value to be realised from transaction with a network of economic actors who would willingly accept that asset as money. The transactome network corresponds to the expected set of agents willing to accept an asset as money in a transaction at some point in the future within the time domain in question.

Speculative  Utility

As the “true” value of a good is not known until the moment of transaction, this term allows for sentiment and supply / demand considerations to affect the market-determined price over time.

Table 2: Aspects of Gogerty & Johnson's Network Capital valuation approach [24]

An important consideration when discussing money is the breadth of the protocol in question. As cryptographic assets are digital bearer objects, there is little discussion or development of instruments of debt, credit, re-hypothecation and so on atop cryptoassets to date in comparison to traditional assets, though the Ethereum-oriented “DeFi” movemement is currently addressing this. This makes them objectively narrow moneys or currencies. Bearing this in mind is helpful when considering the current monetary characteristics of Bitcoin in comparison to legacy moneys such as gold and US Dollars. At present, there is little “financial engineering occurring using the base currency as collateral, which in tandem with no underlying and therefore no redemption utility, limited but improving network utility and high speculative utility the case can readily be made that BTC is currently a reasonable currency but somewhat of a poor money with the potential to become a better one in the future.

1.3.2 What Makes a Good Become Commoditised?

In a general sense, a commodity is a commercial good that becomes standardised and possesses a sufficiently developed market that it may be considered largely interchangeable with another like good - in other terms, highly fungible. In a value transfer sense, fungibility and liquidity are key drivers of commoditisation and a healthy future prospect to remain so. It is instructive to distinguish between time-sensitive (consumables / perishables) and ambient / transformable commodities which are time-insensitive as to their usefulness or delivery value. In the cryptoasset domain, the concept of usefulness or utility maps - at least coarsely - onto the generalised notion of a commodity. How useful a token is depends on the demand to hold or use it, and how necessary it is to engage in a worthwhile activity such as private transaction or access to a decentralised service built atop a blockchain-architected protocol network. Burniske and Tatar's nomenclature of cryptocommodities does seem to be apt and it is reasonable to presume significant levels of utility for BTC, Ether (ETH) and some other PoW-based protocol tokens such as Ethereum Classic (ETC), Decred (DCR) and Monero (XMR) [26]. Analogies have historically been drawn between BTC and digital gold with respect to rarity, durability and mining. Likewise, ETH is often thought of as digital oil as it is used as gas to pay for computation in the Ethereum Virtual Machine (EVM) which executes the network's persistent scripts commonly known as “smart contracts”.

A handful of countries remain that still use something resembling commodity money, even in an abstract sense with indirect central bank backing. Mongolia has a significant level of precious metals backing implied by the ongoing extractive resource mining boom, whilst Lebanon has surprisingly high reserves given its level of paper debt. It has been remarked that globalist economic policies as leveraged by transnational financial organisations such as the International Monetary Fund (IMF) and the World Bank are leading contributors to the decline of nation-state gold reserves, as “rescue packages” given to countries with large current account deficits often involve “liberation” of sequestered commodity reserves. [27]. In the context of a digital monetary network, extent of intrinsic utility or commodityness is also related to unforgeable costliness as the supply of newly mined bitcoin is strictly algorithmically controlled with ever-decreasing supply inflation with mining subsidy attenuating stepwise as the 21 million BTC supply limit is approached. Commodity money was pervasive and long-lived in human society because it held its value well against reference items, as an effective store of value due to limited supply increases. Since the collapse of the Bretton-Woods agreement in 1971 and the subsequent abandonment of an explicit USD gold standard, fiat money has been diverging from its commodity backed roots and losing utility as backing becomes primarily based on faith in the financial management of a territory's ruling regime [28].

In some ways the disinflationary hard cap supply maximum concept does seem to echo the difficulty of prospecting for rare physical minerals and materials, versus an uncapped supply philosophy which intends to maintain transactional utility and lack of friction typically with a constant or declining inflation rate. Some privacy-oriented cryptocurrency networks have shielded token pools within their networks for which the supply is not knowable without breaking the entire cryptographic scheme of the network protocol. Therefore the not uncommon “inflation bugs” which appear even in mature and well-tested codebases such as the Bitcoin Core client and Zcash which were notoriously used to counterfeit large amounts of coins on Bytecoin (a progenitor of Monero) and Bitcoin Private (a derivative of Zcash) may be abused to debase monetary supply without wide knowledge of clandestine currency issuance [29, 30, 31].

1.3.3 Regulating Securitised Asset Issuance in a Post-Howey Paradigm

What do orange groves and golf courses have to do with BTC, ETH, and TheDAO tokens?

A detailed history of securities laws and regulation in the USA, UK and other relevant jurisdictions is beyond the scope of this text and therefore the reader is invited to peruse the referenced works on these matters [32, 33, 34, 35], whilst a brief overview primarily based on American precedent and events will follow. The nominal definition of a security or a securitised asset is a fungible, tradeable product which constitutes an agreement between issuer and purchaser. A security such as an equity - for example a share or stock - or a debt-based instrument such as a bond may further formalise the right to claim future proceeds, cashflows or other outcomes arising from partial ownership of an underlying, securitised asset [36]. The act of issuing a security agreement based upon an underlying asset is known as securitisation.

Three landmark rulings in the United States established a great deal of precedence which is still employed in the present day to legislate and regulate securities issuance and offerings using the Securities Exchange Acts of 1933 & 1934. Given that (for the time being) the US commands a dominant position in global politics and finance, these are often cited as worldwide benchmarks for financial conduct. The case of The SEC against WJ Howey (1946) related to a collective investment contract which offered claims on future cash flows arising from the proceeds of orange groves in California [37]. Whereas the trees and oranges are clearly not securities themselves, the investment contract was found to be consistent with that of a security agreement as the contract established several key aspects within the relationship between contract issuer and investment participant: claims on future proceeds and / or expectation of profit, fractional ownership of the underlying asset, a person or team who are relied upon to maximise shareholder returns and voting control / influence over the outcome of outputs from the underlying. The case involving Silver Hills Golf Club (1961) is also an oft-cited precedent as the fractional ownership offered by collective investment into a golf course constituted the allocation of risk capital with the expectation of capital growth of the principal in addition to any cashflows realised [38]. In the case of Reves versus Ernst & Young (1990), The US Supreme Court adopted a “family resemblance” test to determine whether a particular financial agreement type known as a note is a security or not by comparison with existing assignments of security status of an asset. Key attributes were found to be motivations of seller and buyer, the plan of distribution of the instrument, reasonable expectations of investors and the presence of alternative regulatory regime which would lead to a lowering of investment risk [39].

The Financial Conduct Authority (FCA) in the UK and the SEC in the US have both made pronouncements in 2017 and 2018 that they deem the Bitcoin network, and bitcoin tokens themselves to definitively not be security-like and therefore not subject to securities regulation. The leaderless, permissionless and decentralised operation of the network through thermodynamic means to assign block creation privileges and selection of the canonical ledger history via Nakamoto Consensus is typically cited in rationalisations of these governmental decisions [40, 41]. The meaningfulness of statements justified using these characteristics do suffer from imprecision of definitions (for example not specifying network layers or specific stakeholder constituencies), lack of comprehension of detailed function of a permissionless network, lack of familiarity with open-source software (OSS) development workflows and an ostensible mischaracterisation of the techniques of obfuscation of implicit extra-protocol power structures and diversionary nature of what has become known as decentralisation theatre [43]. This finding is in keeping with the SEC's existing Howey / Silver Hills regulatory paradigm as Bitcoin offers none of the characteristics of leadership, control, cashflows, collectively risked capital or expectation of profit specifically when considering the native token as its own unit of account. Framing this another way, despite the volatile fluctuations of the price of BTC in another unit of account one bitcoin is always still equal to one bitcoin, as with other bearer assets such as the dollar or an ounce of gold - not accounting for demurrage. Considering the functionality of the Bitcoin network, the current value of one bitcoin may be understood implicitly as the value of 75 seconds of the computational resource directed at defending the network from thermodynamic attacks and providing a high probability of assurance that the integrity of the canonical ledger will continue to be maintained.

Comments made in summer 2018 by SEC official William Hinman gave heavy implication that he deemed the Ethereum network to have become “sufficiently decentralised” for its native token ether to not be considered a security, although the token crowdfunding event in 2014 most likely was a securities offering [44]. These comments ostensibly necessitate two features for a robust present-day classification paradigm: a non-binary framework of how security-like an asset is; and a time-dependent component to allow for changes as the network and / or asset matures. This may be justified as follows: the evolving characteristics of proliferating tokenised P2P networks appear to have a significant bearing on the opinions of senior regulators with respect to the security status of particular assets, and no objective boundary (or securityness threshold) to separate objects on either side of exists a priori. The discussion regarding security status of bitcoin had previously also been effectively decided on the poorly defined pseudo-metric of decentralisation which leaves substantial uncertainty over the perceived bounds at which US securities regulators would be prompted to act and make legal pronouncements. By implication in a plurality of SEC officials' public statements (official or personal in nature) was that most other subsequent token offerings were very likely unregistered securities with particular reference to “TheDAO” (DAO), a quasi-securitised leaderless Decentralised Autonomous Organisation" which suffered a catastrophic failure in 2016 following an exploitation of flawed smart contract code [45]. Hinman made further comments in November 2018 suggesting that any token which has its value predicated on the expectation of returns would also likely be considered a security which has potentially wide-reaching implications for a large number of assets, particularly tokens issued by exchanges for the purposes of profit-sharing and / or fee reduction such as Binance Coin (BNB) [46]. Further guidance was issued in early 2019 which made some clarifications as to the SEC's current views but provided little in the way of concrete and actionable advice [47].

The UK's FCA reported findings from its “Cryptoasset Taskforce” which largely mirrored US policy but with a somewhat softer tone, focussing on the need to maintain financial stability and consumer protection with regard to cryptographic asset issuance, trading and offerings [48]. There is still a lack of clarity over policy specifics and indeed more general government sentiment in the major Asian trading locations Korea, China and Japan [49, 50]. A current view of the worldwide regulatory status of cryptoassets can be found in the 2019 Edition of Cambridge University Centre for Alternative Finance's Regulatory Landscape Study [51].

Beginning in 2013 - with early examples such as Mastercoin, Ethereum and MaidSafe - and proliferating enormously in the midst of the 2017 bull market in cryptoasset markets, Initial Coin Offerings have become synonymous with unsavoury practices and behaviours. ICOs promised the disintermediation and democratisation of early-stage venture investing, widening participation beyond the typical retinue of Venture Capital, Angels, Hedge Funds, Family Offices, Trusts and wealthy individuals (collectively referred to as accredited investors) to technically savvy retail investors who were early adopters of cryptocurrency technology. The nomenclature bears uneasy and striking resemblance to the long-established securitisation mechanism of conducting an Initial Public Offering (IPO) whereby a privately held company would become listed on a public stock exchange thus facilitating a wider distribution of prospective share ownership. Naturally such a mechanism would be subject to well-established securities laws in the relevant jurisdiction, with sufficient prior case, tort or written law precedent to guarantee stiff penalties (monetary and / or incarceratory) to disincentivise any potential foul play or unfair practices such as insider trading or unauthorised issuance of securities. A superficially different but semantically equivalent term to describe the issuance of a cryptographic token - usually atop an existing blockchain-architected network platform - is Token Generation Event (TGE), with critics of the phenomena stating that this is simply a last-gasp attempt by regulatory arbitrage participants to engage in security theatre so as to avoid nation-state law enforcement, allowing more time to make their exit from projects or territories coming to realise the complexities of the regulatory situation at hand [52].

In the interests of brevity, a full treatment of observed phenomena and discussion of root causes of the rise to prominence of ICOs / TGEs is beyond the scope of this text. The reader is directed to referenced literature for further information [53]. The key issue to date with this movement has been the cavalier attitudes exhibited by the founders and insiders of such projects. Most token sales to date have suffered from incentive architecture misalignment in extremis: founders collect unconfiscatable fungible assets at the outset (typically BTC or ETH) with essentially no conditions or stipulations on project performance or milestones. Shadow marketing houses and mercenary smart-contract developers pump out misleading promotional materials and unaudited code predictably leading to an extremely high percentage of outright failure or chronic under-delivery of project outcomes [54]. Even the attempt by industry participants to self-regulate and create the Simple Agreements for Future Tokens (SAFT) Framework has not been viewed particularly positively by legal commentators as being definitively legally compliant in the US [55].

With this tilt of incentives towards short-termism it is no surprise that the ICO space has become a magnet for a morally dubious get rich quick ethos, with heavy promotion of unrealistic or even magical claims and a lack of critical counterpoint or technical rebuttal. There has been a wide practice of what the author terms blockchain first, ask questions later whereby the perceived advantages of temporally-sequenced data structures are proffered uncritically and without discussion of the trade-offs necessary to achieve the dubiously optimistic characteristics proffered in marketing material. A combination of magical claims, greed, absent technical acumen and lack of previous entrepreneurial success constituted the typical unregulated ICO in 2017 and 2018, and from comments made in December 2017 by SEC Commissioner Jay Clayton, at that time zero ICO projects had registered their tokens with US regulators as security offerings [56], though this has recently changed [57]. It is common to observe token sales taking place with the exclusion of US investor participation, no doubt due to the United States' Federal Government policy of extraterritorial jurisdiction. A selection of ICO enforcement actions undertaken by the the SEC can be found at the referenced materials, with court proceedings increasing in incidence in early 2019 [58].

There were numerous high-profile examples of the circumvention of typical investor protections by ICO fundraises in 2017 and 2018. Responsible for nominally raising tens of billion dollars collectively, the token sales took place in a situation of network pre-functionality - insofar as the native networks intended to house the tokens were not active or even close to ready - and token-holders were given no rights or claims in the terms of agreements between issuer and purchasers. Frequently companies responsible for creating the network software went to great lengths to explicitly state the lack of rights participants would have on tokens in the future network, or any functionality that those tokens may or may not have in future. These examples are typical of the attempted circumvention of responsibilities as asset issuers in order to engage in both jurisdictional and securities arbitrage, as some opted for a binary company-foundation model while others took their operations to opaque offshore jurisdictions [59, 60].

More recently it has become clear that researchers, lawmakers and / or regulators believe a second type of regulatory arbitrage to have taken place, which can be thought of as psuedo-desecuritisation or decentralisation theatre [43]. By carefully attempting to manufacture asset characteristics so as not to resemble those typically encountered in the traditionally employed definitions of financial product types such as securities, many cryptoasset project founders have intended to steer a course around legislation intended to function as consumer protections for the average investor.

Comment should also be made regarding so-called utility tokens which are typically non-native tokens issued atop blockchain networks such as Ethereum and are designed to be required for the use of a protocol, thereby giving their asset a “unique utility” which is hoped to reduce its resemblance to a security. However this utility token layering model does not appear to have convinced many regulators who seem increasingly suspicious about the claims of intrinsic usefulness when a more straightforward and lower-friction crypto-economic model would be to simply use the base network's native token e.g. ETH. Consideration should also be made to the stability of any asset issued atop an existing network, as network characteristics and performance may vary widely over time and economic or vulnerability exploit attacks are an ever-present prospect. This is especially true in less established networks, which are typically undergoing protocol development with no guarantee of successful outcomes. Stablecoins are another interesting subset of utility tokens which are designed or intended to have reduced volatility versus fiat currencies than typical cryptoassets, and are usually engineered to achieve this by either fully / over-collateralising a two-way peg, algorithmic management or by a seigniorage shares model where adjustments are made in response to market dynamics by adjusting the circulating supply dynamically. Basis is an example of a stablecoin which was under development following highly successful fundraising which has returned capital to investors and ceased work on the project citing regulatory and compliance issues [61]. It is possible that certain stablecoin issuance and / or price stability mechanisms may make the asset in question significantly more security-like.

Security Tokens are another relatively novel subset of utility token, though these are explicitly declaring themselves to be security-like. By following regulatory and compliance procedures in relevant jurisdictions, security tokens may therefore may give direct rights to part ownership in an enterprise, on-chain cashflows, voting / governance rights or other securitised agreements for future claims. Iconomi is an example of an existing ERC20 utility token that is being reissued as a security token [62]. There are questions over the viability of existing security token models due to the onerous compliance requirements for both issuers and holders [63].

1.3.4 Legacy Assets Exhibiting Hybrid Characteristics

Brief mention should be made of legacy assets that may not fit cleanly into one of the above pure asset classes. Gold coins are an example of commodity-moneys, albeit their monetary role has diminished over time. Short-dated securitised government debt such as 3-month US Treasury bills may function as reasonable proxies for money and arguably exhibit commodity-like characteristics as well. To the best of the author's knowledge few other assets exist which exhibit characteristics of both commodities and securities exist unless derivatives such as gold futures, mining company stocks and ETFs are considered to have qualities of the underlying.

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