Consumer Token Offering
(CTO) is a new concept of primary funding for blockchain startups
developed by the Brooklyn project consortium. It involves the production of consumer tokens intended solely to gain access to a specific set of goods, services and / or content within the framework of a running project, which does not require registration and permission from the SEC and other regulators.
From the article you will learn:
- What is a consumer token.
- How is CTO differs from ICO, STO, TAO and IEO.
- What are the advantages of CTO in comparison with other models.
- How to create a consumer token.
What is a consumer token
As the name implies, Consumer Token Offering
is a crowdfunding model that involves the emission of tokens intended solely for the purchase of goods and / or services. Unlike ICO, STO and other methods of primary fundraising, CTO cannot be used to generate passive income or extract investment returns. In addition, CTO-issued tokens cannot be used as a trading instrument that can be exchanged on the secondary market through cryptocurrency exchanges
, which also implies the impossibility of obtaining speculative profits.
In essence, this concept most closely resembles the pre-order model of something (for example, pre-order a video game or an iPhone). That is, you give money now in exchange for the right of priority access to a product or service as soon as it appears on the market without the opportunity to transfer this right to another person. In most cases, this model involves the provision of discounts
to customers: the earlier the pre-order, the greater the discount.
Only in the case of the CTO, “pre-ordered” consumer tokens should also have such functions and limitations that guarantee the passing of the Howey Test. The Brooklyn project believes that such an approach will allow attracting funds to blockchain startups without the need to register and obtain permits from the SEC
and other regulators.
How CTO differs from ICO, STO, TAO and IEO?
5 key benefits of CTO
According to the Brooklyn project, the CTO is an evolution of ICO
, which in 2017-2018 made it possible to easily and easily finance the launch of many blockchain projects, among which are Ethereum, Filecoin, EOS and many others. But unlike the ICO, the CTO will have no problems with regulators like the SEC in the USA, ASIC in Australia or BaFin in Germany. If this assumption is correct, Consumer Token Offering
will have the following five advantages.
# 1. Legal legitimacy
According to ConsenSys General Counsel Matt Corva, when conducting a CTO, there is no need to register the issue with the US Securities and Exchange Commission
or limit sales of coins only among accredited investors. This makes no sense, since it is not about selling “digital” securities, but about selling consumer goods, “which are not similar to an investment contract, nor to collateral, nor to any other financial instrument”.
This is the main advantage of CTO, which greatly simplifies the launch of new blockchain projects
, making this process simpler, faster and cheaper. In essence, such an approach implies a return to the “good old” ICO for blockchain startups without the threat of prohibition and / or punishment from the regulatory authorities. That is, anyone can initiate an initial offer of coins by creating a website
and writing white paper.
For comparison, you can remember Kickstarter,
where people can also finance the creation of a new product (video game, recording a music album, creating a toy, gadget, food, etc.) and then get this product at a discount, thanks to the manufacturer, autograph or other bonus. According to the Brooklyn project, crowdfunding through CTO will be just as easy.
# 2. Lack of speculative interest
CTO implies a permanent or rather long limitation (more than 3 months) on the sale of tokens in the secondary market, which makes it impossible to purchase tokens at a discount during CTO
and their subsequent resale to extract speculative profits. Buying and selling tokens in the secondary market after the launch of the project is also impossible (for some time or at all). Limitations are supposedly imposed by smart contracts
For investors, traders, speculators and other parties who make money on the course speculation in the short, medium term, this is bad. But for everyone else, this is definitely good, since such an approach will reduce market volatility, increase user confidence in a product or service, and also protect against manipulations with the price of a token:
- Pump and Dump. Inflating prices and the subsequent sharp sale of the asset.
- Wash trading. Buying / selling an asset between two or several traders to pump the trading volume, which creates the illusion of interest of the masses in this asset and can lead to an increase in the rate. After pumping volume, the price returns to normal. Thus, you can earn both on the growth and on the fall in the value of the asset.
- Placing a large order to buy or sell an asset without intending to execute it to create the illusion of great demand. That, as in the case of wash trading, leads to a temporary change in quotations.
- Bear raiding. Reducing the value of the asset due to the large number of sell orders from a group of traders in collusion. A very popular way to spread panic in low-capitalization cryptocurrency markets.
The inability to carry out these and other manipulations will save money for ordinary investors and increase confidence in blockchain startups
and the market as a whole.
# 3. Low course volatility
Since tokens issued via CTO
will have restrictions on sales in secondary markets and will not bring passive income, this means that they will not have investment and / or speculative attractiveness. Consequently, the cost of CTO tokens will depend only on the success of the startup itself:
- if a startup (its product and / or service) is popular among users, then the cost of tokens will increase due to an increase in demand;
- if users (its product and / or service) do not like startup, then the cost of tokens will fall due to lower demand.
Due to this, the rate of CTO tokens
will become stable and easily predictable, which will be a big plus for a startup and its users: the product and / or service will not be in high demand if their value jumps by ± 20–100% within a month (which is typical of all cryptocurrency).
# 4. Low entry threshold
was extremely popular in 2017-2018, because it made it very easy and quick to launch a startup with a minimum starting capital. In fact, anyone could create a website, write white paper and use one of the specialized blockchain platforms to create a new coin and sell it to investors. Provide a MVP, pass any tests, provide information about yourself or make a detailed business plan - all this was unnecessary.
The crowdfunding model from the Brooklyn project involves reducing the entry threshold for startups to almost the ICO level. Presumably, this will have three important consequences:
- allow blockchain-enthusiasts without money and support to realize their ideas;
- will contribute to the development of technology by testing new ideas and concepts;
- will contribute to attracting new investments to the market through the development of blockchain technologies and new projects.
# 5. High liquidity
are also interesting in that anyone can participate in them, and not just accredited investors, banks, venture funds, and other major players. Thanks to this factor, many ordinary people became dollar millionaires, having invested in time on the initial offer of Ethereum, EOS, Cardano and other unicorn projects with high ROI.
After the arrival of the SEC and other regulators, such investments have become inaccessible to ordinary people, since these are high-risk assets, which only very rich people or specialists with appropriate education and experience have the right to invest in. On the one hand, this is good, because in this way people are protected from fraudsters and high risks. But on the other hand, this approach also closes the market for those who buy tokens not for money, but for the use of goods or services of a startup.
The CTO crowdfunding model returns consumers access to this market, which is good for all market participants:
- blockchain startups increase the reach of the audience when searching for primary funding for their projects, that is, the chances of finding money increase;
- users get access to services of interest immediately after their launch, without overpaying for it due to speculative price forcing;
- the market becomes more stable and efficient, which increases the growth of investment in general.
How to create a consumer token
In order not to have problems with government regulators and to run the CTO in accordance with all laws, rules and regulations, the Brooklyn Project recommends using their instructions when developing the function, capabilities and limitations of the consumer token. This instruction contains ten concepts:
Consumer Token Design
. The created virtual coin must correspond to the characteristics of the consumer token and be usable within the framework of the launched service.
To make it all right, make sure:
Project management and operation
- That the functions of the token do not include economic rights like equity ownership, securities, corporate debt and / or other characteristics of financial instruments.
- That the token offers or provides access to the goods, services and / or content of your service and, therefore, is of a consumer nature.
- That the token is suitable for use within your service.
. The Consumer Token Offering project should have a transparent and organic management structure. That is, users must have access to information about the management and beneficiaries of the startup, and the management structure must be logical and not cause questions. For this:
- Create an organic (and effective) project management structure in advance, assign professional, responsible people to key positions and periodically check these solutions for improvements.
- Determine which aspects of the project should be centralized and which should be decentralized. Make it clear in white paper and other documents.
- Identify aspects of your startup that should be “open”, “closed” or have limited access rights. For example, you can completely open a development roadmap, partially hide financial statements and fully classify research developments.
- Make sure that the history, portfolio, resume and links to the social networks of the people involved in the project are available for review by the community.
- Monitor and keep the community up to date on development progress.
. Issue and subsequent distribution of tokens should be orderly, fair and transparent. To make it all right, make sure:
- That the conditions and key information on the distribution of tokens is available for review by the community.
- That tokens are distributed among those who plan to use them for consumption, not speculation.
- That the issue money supply does not exceed the expected consumption / use of tokens by users.
- That discounts, bonuses and other preferential terms CTO does not create an investment and / or speculative interest in tokens.
. The purpose and intended use of tokens must be transparent and meet the following criteria:
- Promote efficiency and improve accountability for any funds raised during Consumer Token Offering.
- Ensure continued transparency in the use of raised funds.
. Blockchain startups should always provide complete information about tokens emissions: time, quantity, conditions for reducing the money supply (burning), and the like. So that everything was right:
Softening “wrong” trade and conflict
- Create and specify the rules that govern the issuance and turnover of tokens. For example, the maximum number of tokens and / or the conditions for burning existing tokens.
- Define the rules for handling / storing tokens for all parties. For example, is it possible to sell coins in the secondary market: when, how much, under what conditions, and so on.
- Indicate the factors affecting the marginal size of the money supply.
- Ensure that all parameters for managing tokens are specified in the working code of the service. It is also important to prescribe in the code the ability to automatically track compliance with established rules and restrictions.
. In this case, the “wrong” trade is called the uncontrolled purchase and sale of tokens in the secondary market, which leads to increased volatility and instability of the course. You can soften the undesirable effects of such trade in the following ways:
- Track, explore, manage and eliminate potential conflicts of interest that may stimulate investment and speculative interest in your token.
- Act only within your resource, not trying to influence the behavior of exchanges and traders, in order to reduce sales and quotes.
. Offered during CTO tokens must be safe to use and own. This can be achieved by adhering to the following recommendations:
- Use cryptography, encryption and protection of your service and related products (cryptocurrency wallets, API tools for integration with exchanges, and the like).
- Use an independent audit of software code and smart contracts.
- Inform all participants about any security threats or vulnerabilities found in technologies on your side or third party side.
. Advertising and promotion of the project should be relevant, informative, transparent and honest. For this:
Protect consumer rights
- Ensure that promises made to laws and government regulations in technical documents, on websites and in blogs for buyers, are aligned with the rules laid down in smart contracts.
- Make sure that the advertisement of the service is true and does not mislead potential buyers regarding the nature and functions of the token.
- Do not try to promote a token as an investment asset, a means to invest or provide something, unless this is permitted within the jurisdiction you need. In the US, such an advertisement equals token to securities.
- Do not advertise a token, saying that it is capable of generating passive income. It also equates coin to securities.
. If your token is consumer, therefore, your service must comply with consumer protection legislation (and not investor protection). For this follows:
Compliance with laws
- Introduce mechanisms for the return and refund of consumer funds.
- Develop a consumer agreement, where the rights, duties and restrictions of the manufacturer / supplier and the consumer will be specified.
. The project team and related organizations should make every reasonable effort to comply with the legislation of the relevant jurisdictions. That is, the CTO should be in accordance with:
- KYC & AML rules and financial penalties.
- Data protection and privacy laws.
- Rules of issue and circulation of securities.
- Fiscal laws and regulations.
- Advertising legislation.
- Financial law.