Wolfgang Vitale, Jonas Ajrouche - Decoding Tokenomics: Protocol Research for Legal Classification

Transcript

nice to see you hello zurk hello everyone here I am with Jonas from Bitcoin Swiss to talk about token tokenomics and token legal classification let's go but first of all little disclaimer I have to do this so to make it very clear both J and I just express our own opinions they're not binding to our employer they're not Financial advice legal advice or even life advice come on and you know if you don't like anything you can find me outside or fight me on X so let's start question for all of you easy question not easy answer but we like these questions what is ether like you wake up you think about e but what is it one e equal one e obvious but what is ether

like some people here believe ether is money I'm sure some people are in the ultrasound Money crew as well it can be digital oil productive asset mcoin I don't know what is ether that's the question not such an obvious answer and in imagine asking yourself this for all the tokens in our universe like you go you check the list you have thousands tens of thousands of tokens they do different things different purposes different functionalities what do you do I mean not obvious so for this diversity you have both challenges and opportunities and we really like this I mean we like working in this space because there are so many opportunities it's very exciting it's constantly evolving ecosystem super nice but there are also challenges this is true both

for user investors Builders and Regulators let's not forget Regulators very important so what do we do for investors and users what I want to say is that obviously it's not like you enter you are new to the system and you know what to do it's overwhelming so many talk and they do different things what do I do how do you navigate the space not obvious for Regulators I mean let's be honest you have all these kind of shiny objects that do different things and every day there is something new how do you fit the tokens in the existing laws or even create new laws when the space is constantly changing every day not obvious that's what I'm saying and uh for Builders also you know sometimes it's not as obvious how do you

create your protocol and add new features when you don't know how the law and different jurisdictions we look at it not easy that's all I'm saying so we need to navigate the space better we need a more structured approach and I like and because SS likes I can say also that taxonomies taxonomies are a very important tool instead of doing this work for every single token you divide the universe in sectors and sub sectors and then you can classify tokens and have a more structured approach because s we like taxonomies so much that we actually made one is the Bitcoin swis Global crypto taxonomy that divides all the tokens in the right sectors and Subs sectors according to the functionality of the related protocol and this of

course is very useful for users that need to navigate this space but it doesn't tell you everything also for regulators and Builders you need another kind of classification that can complement this one and here we go to the next section of the talk and I'm very happy to give the mic to my colleague yonas as it's time to low it up thank you very much uh just quickly the the buzzer thanks all right let us start with a brief overview of a few select jurisdictions on the left hand side we see the United States and there the discussion revolves around what is an investment contract is a sale of a token and investment scheme is therefore a token of security well and this is all based on a 1946 US Supreme Court case

that discussed orange grows so our token Securities are they oranges well that's a discussion in the United States and this leads to regulation by enforcement and this is very well illustrated by cases such as the SEC versus coinbase versus ccken versus bitrex versus binance and we can also switch the the agency the cftc versus the Ida or the settlement between zerox and matcha then in the center we have Switzerland in Switzerland uh the Swiss Financial supervisory Authority published the Ico guidelines in 2018 later in 2019 they were supplemented by the stable coin guidelines and in 2021 the federal Council brought the DLT act which amended 10 existing laws so in

Switzerland we chose the technology neutral approach we amended existing laws to have them fit for crypto assets on the right hand side we have the approach chosen by lonstein our neighboring country as well as the EU in lonstein we have the tvtg and the tvtv which are the law and ordinance that um cover crypto asset regulation it as far as I know was also the inspiration for mikar which is the EU framework for crypto asset regulation so you have a dedicated uh rule of set of law which um gives you a lot of clarity for example staking is clear in the uh in lonstein and as opposed to Switzerland where

still some open questions are uh at least on the topic of staking but let's uh discuss Switzerland a bit more I've mentioned ISO guidelines and uh the iso guidelines basically classify tokens within three categories we have payment tokens utility tokens and asset tokens and this fairly early on actually allowed people to participate receive tokens become part of an ecosystem and uh it was fairly own pioneering U from the Swiss regulator or finma in that sense so what is a payment token a payment token is used as a means of payment therefore it needs the characteristics of money and the core

functions of money are medium of exchange a unit of account and a store of value moving on to utility tokens utility tokens are intended to be used in exchange for a service or a product on the blockchain and the focus is really on the consumptive nature of that token so you give it uh and you receive some sort of product or service in a closed ecosystem then moving on to asset tokens asset tokens they uh represent a depbt or Equity claim against the issuer they are like equities bonds derivatives they promise you possibly a future Capital flow and um from that we understand that the traditional Financial instrument if it would be tokenized it would probably

be an asset token but one question if you have a token like Unis swap that technically allows you to vote it resembles a bit the shareholder at the general assembly however the big difference is this is only a technically embedded function it is not a legal right there's no right that you're entitled to vote it's merely a technological function now if staking would be uh possible and a fee switch would be turned on then possibly we would also participate uh in the revenues generated by Unis swap protocol then again the question comes would that then make it a dividend and how would the regulator see this could a utility

token become an asset token and well from an economic perspective which is relevant to the regulator there is the possibility that if it's similar that they treat it in the same way and therefore like an asset token it's called the principle based approach of substance over form but would that then mean that an asset token would necessarily be a security for that we have to look at the definition of a security which is in Article 2 letter B of the financial Market infrastructure act and you can divide that in two parts you have a formal element you have a material element and you need both to have a security and the formal element requires a wrapping some sort of security we have

certificated Securities we have uncertificated Securities any form of security in addition to that you need standardization and suitability for mass trading well uni you can trade it it's standardized it's suitable for mass trading but it lacks One requirement and that's the material element there is no right associated with it and therefore arguably we believe that it's not a security and to conclude each of our legal assessments rely on a technical assessment that is the upto-date snapshot of the fact and circumstances of a protocol and with that I'd like to give back the word to Wolf Gang thank you okay um sorry there is last part I'm not done uh but you know that was a very

very nice conclusion indeed and uh we now know that we have like a mission we have to provide a maximally useful technical assessment report to a legal unit so that they can find out if a token is payment utility asset or security that's my mission that's my goal so I'm going to prepare this Tech assessment both on the protocol and the token economics how do I do that well research how do I do research I need resources first thing find high quality resources and for me high quality means as closest possible to the source so to the team to the community I go look at the website I go look at the docs governance Forum Discord you name it high quality resources you start from there and you get your research activity

and research has different components there is what I call general research means I try to understand as much as I can about the protocol and token in general then I have experience like practical experience when you can actually try the product and have a feeling of how it actually works that helps a lot it tells you many things then there are specific questions and what do I mean by that these specific questions are on top of general research General you try to understand as much as you can specific question those are questions that I know by experience that if I provide very clear answers to these questions then legal is Happy their job is easier not easy but easier so let's start with these specific questions

first first question that you have to ask yourself are there any entities in the protocol with special roles what do I mean by that the first thing you need to do when you look at the protocol you know you want to you are trying to understand the protocol and the game you need to know the players like who's involved what are these different groups are they permissioned are there specific requirements to enter in these groups what are their roles how are they interrelated these something that you need to clarify as soon as possible so in the case of ethereum for instance you need to know about consensus participating full nodes of course because it's not a fully open role there is a rule that you need to deposit 32 ether in the St deposit contract and

then you enter this group and you have this special role of deciding consensus and security the chain in the case of ethereum and other big protocols it's also important to know about off protocol roles like all the players involved in the IB supply chain entities involved in offchain governance this question is where you set the game and the players next another big fundamental question that you need to clarify immediately can the protocol be modified and if yes how because you know you can do your very nice research of a snapshot of the protocol today but you also need to know what can possibly change like are smart contracts upgradeable is there a governance process is there an admin key you know you need to know these things and uh for

ethereum we have offchain governance so this depends on an open research environment and different entities that find agreement offchain on what are the next upgrades to be included in and hard work and then at the end it's always up to node operators to adopt the change next question what is the Mone of the token like does the token have money properties and you heard what are the properties of money so unit of account Med Exchange store of value um so here I'm trying to see if the token is actually used for payments not just presented as good for payments is it used in onchain economies nft marketplaces gaming application or even offchain economies and this is for sure the case for ether that can also be

argued having good store of value properties next is the token required to participate in the protocol it's an open question and basically here you're trying to see if the protocol has some functions and features that you can access only by having the specific token that we're assessing so staking governance and so on for the case of of ether we know that ether is required to access the network resources paying for gas and blobs and staking and uh yeah it's definitely used for participating in the protocol then we we are going to look at the supply you need to know about the token Supply is it fixed can it change

are there minting mechanisms burning mechanisms and most importantly if yes why like what's the point of minting or burning it depends on the protocol you have to see and you need to know if the supply is net inflationary or deflationary in the case of ether we have issuance to incentivize validators and burning because you burn a portion of the protocol fees to avoid gas fee manipulations and economic abstraction of ether then is the token related to incentive mechanisms are there economic incentive mechanisms defined by the protocol and is the token related to it like you need to openen to access the incentive or the token itself is the incentive these kind of questions and again always why is it for compensating for work or risk and uh

yes this is the case for ether as ether is used in staking but it's also at risk of slashing if you don't follow the protocol rules and the final question is do token holders participate in the success of the project this means are there some effects or mechanisms such that if the project becomes more successful for instance higher adoption then the token holders know that they will have additional value like value acral to the Token for instance and if yes you also want to make very clear if this is true for all passive token holders or if some onchain action is needed so in this case you get see as as examples buy back and burn mechanisms protocol Revenue

distributions these are the things that you need to look at U for E all we can say is that um High success means High adoption High Network demand potentially a net deflation is apply in a stable way and people might see this as value approval for the token alers so to summarize I create this technical assessment these reports protocol and token economics I send them to the legal unit we have a legal assessment and finally a nice legal classification payment asset utility security this is very nice but the job is not just done because these things can change unless you found out the protocol cannot change so we keep

monitoring and scanning the resources to trigger potential reclassification if we see something changed in the token economics or the protocol itself and with this that's all I have I answer what is either but if you want to know more about ethereum the protocol I have a workshop tomorrow morning and I will be very happy to see you there that's all thank [Applause] you oh no here we go back again thank you very much Wolf Gang and yonas from Bitcoin Swiss thank you again but actually to be fair I got to keep you around luckily we have a gap in the schedule briefly and so this time I'm

actually going to allow even two questions count yourselves lucky so if anyone has any questions for y Johannes and Wolf Gang let's go what we got there we go run run run run like thanks that was a really clear I think a lot of lawyers like to use jargon and that wasn't jargon at all it was really good um on the monetary aspect of the token is it primarily if the project says hey this is money because the project can't really control what secondary markets are being created for their token right like maybe binance Lista or somebody creates pool on Unis

swap so it's some degree like monetary but on the monetary aspect that you're checking in the classification is it only if the project says hey this is money no you want to take this yeah I was not sure if that was directed to me or to Wong okay yeah so if if they tend to use it as a money and it's not used for that case well then we we don't uh take that into consideration we look at what from an economic perspective happens so whether they want to do it or not it's how it is used in actual terms thanks for the question perfect any more for any more another question there we go I love it this one's quick it's good

how you doing um I come from America be to Switzerland because because of the laws there I switched and came to mme legal for the last eight months and I'm creating an nft project have you seen or felt any ideas of them trying to pull them into some of this because right now the AML laws and kyc and everything's starting to creep in and their new one I can see the future once I start they're going to change it and I just wanted to feel out what you thought about the nft markets it's your okay um well my my thoughts on nfts I don't have too many thoughts to be honest the the thing is if they are not I want to clear it up

that when I say nfts these aren't like pictures of monkeys and stuff it's utilities that give discounts and all these different pieces to this whole entire platform that they're going to see it and go oh wait we didn't think of that yet that's what I'm I'm just reading through and I just wanted to see if you looked at it's a new St I'll tell you about it I'll talk to you about it but I don't want to waste everyone's time yeah let's let's let's talk uh sure for sure but uh if there is a discount with the token Associated or with the product then it depends on if it's only usable for within the ecosystem or if it's outside also usable if it's in the ecosystem I don't see too many problems from the boat here but uh we would need to obviously have a closer look on that

yeah sure sure let's talk outside for sure thanks there perfect thank you again for Wolf Gang and yonas [Applause]