Introduction
Traditional capital markets serve as intermediaries connecting savings with investment opportunities. Companies raise funds by issuing securities like stocks, allowing investors to share profits and stimulate economic growth. However, securities require extensive issuer disclosures (financial reports, governance practices) to validate their worth—a process incurring high regulatory costs. This framework contrasts sharply with emerging blockchain-based fundraising methods.
The Rise of ICOs
Bitcoin's 2017 price surge (nearly $20,000) spotlighted cryptocurrencies and their underlying blockchain technology. Initial Coin Offerings (ICOs) emerged as a disruptive fundraising model, raising $6.1 billion across 872 projects in 2017 alone (ICODATA.IO). By October 2018, ICO volumes exceeded $7.1 billion through 924 campaigns.
How ICOs Work
- Mechanism: Companies issue blockchain-based tokens instead of traditional securities.
Process: Investors purchase tokens using fiat currency, Bitcoin, or Ethereum, typically in exchange for:
- Product/service access
- Profit-sharing rights
- Voting privileges
- Speed: Transactions settle within hours via immutable blockchain records, with some ICOs closing within days.
Risks and Regulatory Responses
Global Divergence
- China: Banned ICOs in 2017 citing financial秩序 risks.
- Taiwan: Financial Supervisory Commission (FSC) case-by-case evaluation of whether tokens constitute securities under the Securities and Exchange Act.
Key Legal Question
Are ICO tokens "securities"? Taiwan's Supreme Court ruling (Case No. 104-Tai-Shang-3215) outlines three criteria:
- Representation of value
- Investment nature
- Transferability
Tokens granting profit-sharing or voting rights may qualify—subjecting issuers to securities laws. Unauthorized ICOs risk criminal liability.
The Howey Test Framework
U.S. SEC applies this four-pronged standard (SEC v. W.J. Howey):
- Monetary investment
- Common enterprise
- Profit expectation
- Returns dependent on others' efforts
👉 Understanding Howey Test applications
SEC's 2018 Clarification
Tokens avoiding the fourth prong (e.g., Bitcoin's decentralized valuation) may escape securities classification. However, determinations remain fact-specific and dynamic.
Utility Tokens vs. Securities
Defining Characteristics
- Purpose: Access to issuer's services (e.g., airline miles, social media tokens).
- Value Drivers: Network effects—value increases with user adoption, not managerial efforts.
Critical Differences from Securities
| Feature | Utility Tokens | Traditional Securities |
|---|---|---|
| Value Creation | User participation | Issuer performance |
| Primary Function | Service consumption | Dividend/profit entitlement |
| Regulatory Implication | Often non-security | Strict compliance required |
A New Model for Digital Entrepreneurship
Overcoming Capital Barriers
- Traditional Model: Heavy upfront subsidies (e.g., ride-hailing discounts).
- Token Advantage: Early adopters rewarded through token appreciation driven by network growth—no massive VC funding needed.
Case Study: Bitcoin
Mining incentives created a self-sustaining ecosystem where participant efforts fueled value growth. Similar models could empower Taiwanese startups.
Policy Recommendations
- Clarify Status: Exempt utility tokens from securities regulations via administrative rulings.
- Attract Investment: Position Taiwan as a global hub for compliant token offerings.
- Balanced Approach: Adapt existing frameworks without compromising market integrity.
FAQs
Q: What distinguishes security tokens from utility tokens?
A: Security tokens derive value from others' efforts (e.g., company profits), while utility tokens gain worth through user adoption and functionality.
Q: Why did China ban ICOs?
A: Concerns over fraud and financial instability prompted a blanket prohibition—unlike Taiwan's case-specific evaluation.
Q: How can startups leverage utility tokens legally?
A: Structure tokens to emphasize service access over profit-sharing, aligning with non-security classifications.
👉 Explore compliant token models
Conclusion
ICOs present transformative fundraising potential but require nuanced regulation. By creating certainty around utility tokens, Taiwan could foster a leading digital asset ecosystem—balancing innovation with investor protection. The window for competitive advantage remains open, provided policymakers act decisively.