Cryptocurrencies generally operate without any intermediary,
like a bank or a government, so if something goes wrong you cannot write a
letter to anyone and complain. They function over a network of many thousands
of computers around the world, connected directly or indirectly. There has recently
also been an explosion in the tokenisation of crowdfunding and crowdsales
around the world, in which tokens are acquired through an Initial Coin Offering
(an ‘ICO’). This new phenomenon is the beginning of what has been called ‘Web
3.0’ or the ‘Financial Web’ or ‘the future of the financial internet’. Just as
internet giants such as Facebook and Google rose out of the collapse of the dot
com bubble, new titans will rise out of the taming of this new ICO exuberance.
People are experimenting with these arrangements and, although the amounts involved
are large by the standards of the average person, they are small when compared
to amounts regularly being transferred by credit cards.
The nature
of a token
The best way to think about crypto tokens is to imagine a
children’s tea party, at which the miniature tea pot, milk jug and tea cups are
all empty of any liquid and, although the participants appear to be drinking
tea, they are actually drinking nothing. They believe, at least at some level,
that they are drinking something (tea) and are enjoying it. It is the same with
crypto. There is nothing in the software ecosystem in which crypto run that can
be identified as the token itself and the token does not exist outside that
software. The calculations made by the system, however, show that a participant
is entitled to transfer tokens, which exist and function because all the
participants share the view that they do. The participants believe that they hold
something and that that something has value. The law recognises that such a
belief can confer a property interest, which can be held on trust.
Because a token does not actually exist, except in the minds
of those who believe, understanding its nature is counter-intuitive. It is a
property interest with no rights or obligations attached to it. There is a
protocol network that can be used to transfer it and receive it but no one can
be forced or ordered by a court to process the transfer and no one can be
forced or ordered not to process it. The process is carried out in a network of
independent computing devices (for instance, in the case of bitcoin) situated
around the world and there is no way to predict in advance which of those devices
will process and confirm the next transfer that is sent into the network.
Tokens
There are currently three main types of token being used,
although this list is not exhaustive and is likely to increase as more and
different arrangements are conceived.
Coin token
This is the simplest manifestation of the token, and an
example is bitcoin. It exists as a property interest and its value is
speculative and variable according to market conditions.
Utility
token
This is a crowdsale token, which is transferred to a
contributor in an ICO. It enables the contributor to participate in the
implementation of a project, which may be the development of software or the
manufacture of a hardware item. It is a property interest that can be bought
and sold once it has been issued, but there is also a contract between the
promoter and the contributor.
Tokenised
security
This is a crowdfunding token that is transferred to a
contributor in an ICO. It can represent shares or equity, or some other interest,
in an existing business that is raising funds or in a business that will come
into existence on the completion of the ICO. Issuing such a token generally
requires compliance with financial services regulations.
Unlike shares, these tokens carry with them no rights and
obligations. Unlike something in the nature of a cause of action, once they
have been issued in an ICO, the tokens are divorced from the issuer and an
independent market for their sale and purchase can develop; indeed, very often
this is one of the main reasons for using the ICO rather than web-based
crowdfunding techniques. The benefit of the contract between the promoter and
the contributor, however, does not necessarily pass with the transfer of the
token and the formalities of assignment should be considered, unless the
provisions of the ICO agreement are within s 1 of the Contracts (Rights of
Third Parties) Act 1999.
Leigh Sagar is a Chancery barrister at New Square Chambers,
Lincoln’s Inn and Chairman of the STEP Digital Assets Special Interest Group.
This article is extracted from his forthcoming book, ‘The Digital Estate’: leigh.sagar@newsquarechambers.co.uk
