Regulation is the biggest issue to hit the cryptocurrency markets, says Henrik Andersson, chief investment officer of new crypto fund, Apollo Capital

What are the parameters to determine the difference between a utility token and a security token? 

I think this is one of the most timely issues in crypto land right now, especially when it comes to ICOs.

We’ve got regulators around the world saying that some of these ICOs are technically securities and have to abide by securities law.

If you sell a token to a US person, you have to abide by securities law that dates back to 1933.

Utility tokens, also called user tokens or app coins, represent future access to a company’s product or service.

The defining characteristic of utility tokens is that they are not designed as investments. If properly structured, this feature exempts utility tokens from federal laws governing securities.

The Howey Test sets out what is and isn’t a security, and was first founded from a 1946 supreme court case in the US.

In the context of blockchain tokens, the Howey test can be expressed as three independent elements.

All three elements must be met in order for a token to be a security:

  1. An investment of money,
  2. in a common enterprise,
  3. with an expectation of profits predominantly from the efforts of others.

Consequently, if you are selling a security there are laws that apply.

It doesn’t matter where in the world you are — if you are selling to a US citizen, there is the long arm of the law to consider.

The same goes for most jurisdictions. For example in Hong Kong exchanges are not allowed to list securities unless they abide by securities laws or are regulated under that.

When it comes to cryptocurrencies there is the risk that exchanges that list security tokens could be shut down by regulators.

That is one of the most important things to consider for the ICOs coming up now.

How can investors be sure they are buying into a legitimate token?

The best framework for investors to check a token’s classification is a paper put out last year by some of the leading exchanges such as coinbase and consensus.

Some of the key points are whether they have a product today, is it in development, or are they doing a dividend. If they have some of those points there is a high risk it could be deemed as a security.

How do you see ICOs changing in the next 6-12 months?

Regulation will be a key focus in the year to come.

The decision by the US regulator to classify the DAO token as a security was a real turning point, especially because in that same statement they said that Ethereum was a real utility token.

It is likely that regulators go after exchanges that list the securities, rather than the ICOs themselves because they are easier to go after.

But it is not all bad news, there is a huge exciting upside – and that is that we may actually have crypto securities one day. It opens up the potential for liquid markets just the same as we trade stocks or bonds now but to be tokenised.

The way it is at the moment, if the token hasn’t got an exemption from a security law – you should be very careful investing in it.

We are staying away from those tokens.


Henrik Andersson is the chief investment officer for new crypto fund, Apollo Capital.

He has over 17 years experience in global financial markets, with almost a decade on Wall Street. Henrik has extensive experience across three continents as a quantitative analyst, senior research analyst and in institutional equity sales.

Apollo Capital is Australia’s premier crypto fund, allowing sophisticated wholesale investors to gain access to investment opportunities within the crypto asset market.


This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.