It has been a tumultuous period for Quantstamp -- a blockchain-based project that aims to decentralize smart contracts auditing --after the team accepted U.S. dollars and Ether instead of its token to fund its platform. The project raised over $30 million in its Initial Coin Offering (ICO) in November, exceeding its targeted $11 million and distributing 65% of their Quantstamp Protocol (QSP) tokens out of a supply of 1 billion according to Coindesk. However, they add that the recent actions have token owners scratching their heads:
“Friday's discussion showcases that token owners are beginning to question the degree to which both QSP and the company's own technology have been involved in the 484 audits Quantstamp claims to have completed, according to its website.
Documents obtained by CoinDesk indicate that the company has accepted ether (ETH) for services in one instance and priced its offerings in U.S. dollars in another, practices that appear to have run afoul of user expectations, with some claiming this clashes with practices they believe the company said it would pursue.
"We are concerned that you guys don't need the token to grow in value for your company to succeed as a payment for manual audits," James Chun wrote in the Quantstamp project's Telegram group on June 10.”
As another user put it, if Quantstamp isn’t “willing to hold and find value” in their token, it will end up affecting the return on investment. The project’s creators have defended the alleged actions, stating that the confusion stems from a lack of clarity on their part when informing users about the differences of their products and the “vision” they outlined.
The general fear with Quantstamp token holders and any token holders out in the crypto community is that the tokens hold no actual value. In Quantstamp’s case, it would seem that this confusion is their greatest enemy and has users in an uproar.
With Quantstamp and other projects like it in the headlines, the need to separate a utility token from a security token is more crucial than ever. This would ensure investors that a token is indeed a utility or the project is abiding by regulations from the start with any surprises.
First, we need to define the difference between a utility token and a security token
A utility token according to Strategic Coin represents “future access to a company’s product or service.” For Quantstamp, their token was being offered as a way to pay for their auditing service, with their Whitepaper outlining the different ways their token is put into play. As a utility token, it would not be considered an investment, instead working as a sort of “coupon” for service, and thus not under the watch of regulations – though SEC regulators do keep a watchful eye on utility tokens to ensure they aren’t a security in disguise.
That’s the main difference with a security token, which is any token that brings value to a project through external assets according to Strategic Coin. The risks with a security token are high for a company due to the need to follow securities regulations and their stiff penalty for infractions. These tokens must also be delivered under SEC or similar rules for use in the United States or other countries.
However, the benefits to investors are evident, including equity to holders and possible shares in a company through the token. Coinsutra uses what is called the Howey Test to determine if a token is a security:
“A security is found to exist when all four of these elements exist:
1. Investment of money
2. In a common enterprise
3. With an expectation of profits
4. From the efforts of others.”
If a token doesn’t check off those boxes, it likely isn’t s security. If it is and it isn’t labeled as a security token, you need to be careful.
Each type of token comes with advantages and disadvantages. For a utility token, its success relies on the product, service, or platform that it was created to work with. If that product ends up falling flat, so does the token and your investment. Utility tokens also come with the possibility that they are actually securities trying to stay under the radar – as mentioned above.
There are possible frauds, non-compliant companies, and many others being sniffed out by regulators while acting as utility tokens, upping the risk that capital could end up frozen or lost. All things that should be taken into account before investing.
That’s where security tokens are different. These tokens are coming out of the gate saying they comply with regulations, are backed by private or external assets, and offer an ROI to those holding the tokens. There is the chance could fall foul of regulations, but a project that uses a security token has generally done homework on its offering, giving credibility for those not willing to take a riskier option.
In another way, uncertainty for investors can be a headache or a killer for companies, even without regulations. It might be Quantstamp operating in a way that its token holders feel goes against its initial outline, or it could be a blockchain project like Tezos saying it will now “carry out know-your-customer and anti-money laundering (KYC/AML) checks on ‘contributors’” a year after their ICO – something investors feel should’ve been made clear from the start.
Keeping a clear line between security tokens and utility tokens is essential for the future of crypto markets going forward. More and more, governments and regulatory bodies are looking closer at crypto and blockchain technologies, especially as larger entities are looking to them as the future. Having that line will ensure that projects won’t have that murky area where token holders and investors become surprised at a change.