When bitcoin reached record-level valuation last year and started grabbing headlines, people noticed — including Ted O’Neill.
O’Neill, CEO of the Charleston-based online platform creator Social Strata, had a vision of a social network that allows users to benefit from the work they post — “a content economy,” he calls it — and he thought cryptocurrency and blockchain technology could be the key to making it work.
Blockchain is a digital database that can be used and shared within a decentralized, publicly accessible network but cannot be edited after entries are added. It’s often used to keep track of transactions involving cryptocurrency — digital coins that can take the form of digital currency, utility tokens that allow future access to a product or service, or tradeable assets known as security tokens, which makes them subject to securities regulations.
“All crypto really is, in many ways what it is, it’s future value,” O’Neill said. “Crypto projects right now have these obscene valuations, and they don’t even have a product.”
O’Neill and his team began developing a platform for Narrative, their new social network, and in February and March, Narrative sold utility tokens to raise money for further development. People who bought utility tokens had access to Narrative’s alpha phase, which was launched the day the token sale closed. The platform is still in the alpha phase of testing, but O’Neill said he expects Narrative to enter beta testing in the next few months.
Users will be paid in Narrative’s cryptocurrency for their content, based on the community’s reaction to the content, with 85% of Narrative’s revenue going back to its users.
O’Neill estimates the spring token sale raised $5 million for Narrative.
“What I love about the token sale model in general ... is it really does allow regular people who are excited about a project to get in on the ground floor and really help build it, too,” he said. “Because with token sales, you’re not investing in a company per se, you’re investing in a project.”
O’Neill said selling utility tokens is a variation of crowdfunding campaigns, but crowdfunding campaigns often have a guarantee of some kind of refund if a product isn’t developed. Token sales have no such guarantee, which is why O’Neill said it’s important for people buying tokens to be cautious.
Still, he said, buying tokens means consumers have a chance to get tokens that have a lasting currency value in addition to funding a company’s project.
“I think if it works for you (your company), and assuming it’s a viable model, whether it’s utility or security token and you’re following all the proper regulations ... then I think it’s worth considering,” he said.
Securities and Exchange Commission Chairman Jay Clayton said in December that “the technology on which cryptocurrencies ... are based may prove to be disruptive, transformative and efficiency-enhancing,” but he warned investors to do their homework before buying tokens.
“I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so,” Clayton said in a statement.
‘Laws must be followed’
O’Neill said he applied the SEC’s “Howey test” — a methodology put in place by the U.S. Supreme Court in the 1940s to determine whether something is an investment contract — to decide whether the tokens he was selling were securities. Because the tokens could be used only on the Narrative platform and allowed people access only to the platform, he determined the tokens were not securities.
Clayton said he believes initial coin offerings, a common term for token sales, can be effective for entrepreneurs to raise funding, but he said any activity that involves offering a security must be accompanied by the disclosures and investor protections required by law.
“A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed,” he said.
One benefit to a token sale is that it’s not restricted by countries’ borders; that also presents some challenges, however.
“Every country is different,” O’Neill said. “There’s not like one international body that says, ‘OK, this is what a token sale is, this is how you do it, and you’re done. Do these things.’ That’s the tough part, especially ... in terms of figuring out what the regulation is, who you need to talk to and how to make this thing legal.”
O’Neill said he almost registered the token sale in Gibraltar, the British territory on the southern coast of Spain, instead of the U.S. because of its clear regulations around cryptocurrency. In the end, though, O’Neill said he felt more comfortable registering in the United States.
“Setting up in the U.S. was important for us, too, because we don’t want to feel like, ‘Oh, we’re setting up in Gibraltar because we’re afraid of U.S. regulators,” he said. “I’ve said from day one, I welcome regulators — come knock on our door, whatever. I feel really strongly about our token and the way we did things.”
O’Neill said he had a third party check everyone who bought Narrative’s tokens in an attempt to keep all transactions aboveboard, especially given that U.S. regulations of cryptocurrency are nebulous.
“It would be nice if there was more clarity from the U.S. government because, you know, you lose sleep at night wondering, ‘I think I did everything right, but, you know, there’s no guidebook on what to do here,’” he said. “So those are the kind of things that sort of worry you at the time.”
O’Neill said regulations could help curb some of the “Wild West” perception that people have regarding cryptocurrency and utility tokens, as well as clarify the distinction between utility tokens, which are digital tokens sold as a method of fundraising, and security tokens, which are securities that are tokenized and sold using blockchain technology.
He said it could even be done at the state level. For example, Wyoming recently passed legislation that defined utility tokens and exempts cryptocurrency from state property taxes in an attempt to stand out as a crypto-friendly state.
“It would be great if South Carolina took the same approach because I think it could be a really good way to get more businesses coming into South Carolina if we had clear crypto/blockchain regulations on the books,” he said. “You’d just take a lot of the uncertainty out and you can just attract more entrepreneurs.”