A couple of weeks ago, Wyoming became the first state to formally create a new asset class: utility tokens. Wyoming continues its own trailblazing tradition that previously established a precedent for Limited Liability Corporations (LLCs). What is fascinating about the law is it takes a substantial step in the right direction -- there's not much to dislike about it. The lawmakers clearly attempted to get this right and clearly wanted to support companies and projects offering new utility tokens.
Full text of the Wyoming House Bill 70
Why It Works
The law exempts utility tokens from securities and money transmission laws, as well as property taxes. If other states follow Wyoming's example, we will likely see a showdown with the Federal government that all parties will need to reconcile. Following the LLC tradition, it was about a decade before LLCs had a nationwide breakthrough following Delaware's advancement of a framework that worked out the tax situation with the IRS, among other things. With utility tokens, there will be a reckoning with these groups at a minimum:
- SEC: Claims tokens are securites
- FinCEN: Claims tokens are Currencies
- IRS: Claims tokens are property subject to capital gains
Basic Definition of a Utility Token
The law refers to an “open blockchain token," which is more commonly known as a utility token in the blockchain/crypto industry. The definition:
- Created in response to the verification or collection of a specified number of transactions relating to a digital ledger or database
- Created by deploying computer code to a blockchain network that allows for the creation of digital tokens or other units
- Recorded in a digital ledger or database which is chronological, consensus-based, decentralized and mathematically verified in nature, especially relating to the supply of units and their distribution
- Capable of being traded or transferred between persons without an intermediary or custodian of value
The definition is particularly astute on the points of consensus, decentralization, and dis-intermediation. Satoshi couldn't have written this much better.
Legal Requirements of a Utility Token
The legal requirements are reasonable, as well, especially when compared to New York's much-maligned BitLicense, a business license for cryptocurrencies.
Utility tokens must meet these conditions:
- File notice of intent with the state. This is a notice only, not an application. The state does not play a role in approving or rejecting the token.
- Must be a vehicle for the exchange of goods, services, or content (aka "consumptive purpose")
- Must not be offered as an investment. At least one of the following is true
- Token is reasonably believed to be sold to the initial buyer for a consumptive purpose
- The token has a consumptive purpose available at or near the time of sale
- If no consumptive purpose, the initial buyer is prevented from reselling the token until a consumptive purpose is available
- Developer/seller takes reasonable precautions to prevent buyers from purchasing the tokens as a financial instrument