Consumer Token Offering: The Next Evolution in Blockchain Crowdfunding

The cryptocurrency landscape has evolved significantly in recent years, shifting from Initial Coin Offerings (ICOs) to Security Token Offerings (STOs) and now to Consumer Token Offerings (CTOs). Unlike their predecessors, CTOs involve selling tokens that are not classified as securities, offering a refined approach to blockchain-based crowdfunding. As CTOs gain prominence, it is crucial to understand their advantages over earlier fundraising models. 

In this blog, we will explore the concept of CTO, the process of creating CTOs, and the benefits of CTOs. 

Let’s Dive In!

What is Consumer Token Offering?

CTOs are the new era in the blockchain tokens and share similarities with STOs and ICOs but are fundamentally different in their purpose. Instead of focusing on securities or tradable assets, CTOs are designed to provide consumers with tokens that can be used to purchase products or services. Unlike securities, these tokens are not made for trading, making them distinct from traditional token offerings.

Joseph Lubin's Vision for CTOs

Joseph Lubin, the founder of ConsenSys, a leading blockchain solutions company, highlighted the significance of CTOs in his keynote speech at the SXSW festival in Texas stating that the financial year 2019-2020 will mark the rise of Consumer Token Offerings. Lubin announced that ConsenSys plans to launch 4-5 CTOs, with Civil's CVL token being the most anticipated. Civil, a blockchain-based journalism platform funded by ConsenSys, will introduce the CVL token as a consumer token available to everyone, allowing users to access ethical newsrooms.

Will the SEC Approve CTOs?

One common question is whether the U.S. Securities and Exchange Commission (SEC) will approve CTOs. Lubin confidently believes the SEC will, as CTOs do not fall under existing securities regulations. The reasons for this are:

Designed for consumption: Consumer tokens are created specifically for use in purchasing goods or services.

Built under the Consumer Token Framework: ConsenSys' Brooklyn Project established this framework to facilitate the formation of CTOs.

No resale or speculation: Unlike traditional securities, these tokens cannot be resold or speculated on for financial gain.

Different from utility tokens: While they resemble utility tokens from ICOs, they have distinct purposes and are not merely rebranded versions of those tokens.

No value appreciation or trading: Consumer tokens will not increase in value or be tradable.

Not securities: These tokens do not meet the criteria to be classified as securities.

No SEC registration needed: According to Matt Corva, ConsenSys' General Counsel, there is no need to register CTOs with the SEC, as they do not qualify as securities.

No investment contracts: CTOs are not investments or financial instruments but are intended for product or service redemption.

Designed for use: Consumers can use these tokens to claim products or services. 

Are Consumer Tokens the Same as Utility Tokens?

Although similar in concept, consumer tokens are not utility tokens. Utility tokens can be appreciated and traded on exchanges, while consumer tokens are exclusively designed for the direct consumption of goods and services. 

Why the SEC Will Likely Approve CTOs

According to SEC guidelines, tokens that are properly developed, structured, marketed, and have a clear use case are not considered securities. This provides further support for the potential approval of CTOs by the SEC.

Promising CTO Launches from ConsenSys

Civil (CVL Token): Civil is a blockchain-based journalism network that offers consumer tokens to news readers. By purchasing CVL tokens, users gain access to ethical newsrooms, creating a membership-driven news ecosystem.

FOAM: This project offers an alternative to GPS, designed to prevent false location data and aid in the operation of self-driving vehicles. FOAM is another project utilizing the Consumer Token Framework for its CTO launch.

Both Civil and FOAM demonstrate the potential of CTOs to revolutionize industries by offering consumer-focused tokens for practical use.

Steps to Create a Consumer Token 

To create a consumer token, one must follow the guidelines set by the consumer token framework established by The Brooklyn Project. This framework emphasizes several key concepts to ensure the token is consumptive, transparent, and compliant with regulations.

Consumer Token Design:

The token must possess the characteristics of a consumer token and be functional for use. It should not have features resembling equity-like economic rights, ownership stakes, or any traits of a financial instrument. Instead, the token should provide or represent access to content, goods, or services, making it consumptive. Usability is essential, ensuring the token can be practically utilized by consumers.

Project Governance and Operation:

A Consumer Token Offering (CTO) project should maintain a transparent and organized governance structure. Establish an appropriate governance model, periodically reviewing it for potential improvements. Clearly define which aspects of the project will be open-source or forkable, and ensure continuous transparency in reporting project progress. Clarify which project elements are managed centrally and which are decentralized, while ensuring the credentials of those involved in the project are accessible and accurate.

Responsible Token Distribution:

Token distribution must be carried out in a fair, transparent, and organized manner. Terms of distribution should be clear to all participants, avoiding practices such as selling tokens to speculators who do not plan to use them, offering discounts or bonuses that create expectations of financial returns, or distributing quantities that exceed the expected consumption. Ensuring tokens are distributed in alignment with their intended use is critical.

Purpose of Token Distribution:

If token distribution is used as a fundraising mechanism, the purpose and intended use of the funds must be transparent. There should be clear accountability for the funds raised, with ongoing transparency about how the funds are used. Investors should be informed of how the money is being allocated throughout the project lifecycle.

Token Supply:

Projects must explicitly define token supply criteria and manage retained inventory.  The rules governing the total token supply should be explicit, such as how many new tokens can be minted or how existing tokens may be burned. Governance regarding retained token inventory must be defined, and the factors that affect the circulating token supply—such as transfer restrictions and lockup periods—should be transparent and auditable where applicable.

Mitigation of Improper Trading and Conflicts:

To maintain fairness in secondary markets, the project should manage and mitigate potential conflicts of interest. This includes avoiding practices such as self-dealing by project insiders, manipulating the number of tokens available for sale, rigging token values, or spreading false information that could influence token prices.

Token Security and Safety:

Security and safety are paramount when offering consumer tokens. Effective security measures should be adopted, including third-party audits of all smart contracts involved in the project. The project team must address any security vulnerabilities promptly and keep token holders informed of any risks or issues discovered in the underlying technology.

Marketing Practices:

Marketing activities for the coin should be equitable and appropriately reflect the project and product. Any promises made in whitepapers, websites, or blog posts must align with the rules encoded in the project's smart contracts. Additionally, token marketing should not mislead buyers, nor should it promote the token as a financial investment unless fully compliant with financial regulations. Marketing should avoid emphasizing the ability to re-trade tokens for passive profit in secondary markets.

Protecting and Empowering Consumers:

Consumer tokens must protect and empower token holders. Mechanisms should be in place for refunds or compensation if the project is abandoned or canceled. Legal documents should clearly state the responsibilities, expectations, and restrictions for token purchasers. There should also be provisions for buyers to receive value for their contributions to the project.

Compliance with Regulations and Applicable Laws:

The project and associated entities should make all possible efforts to be in strict compliance with relevant regulations and laws, which would relate to but not be limited to tax laws, securities regulations, data protection and privacy laws, truth-in-advertising rules, and state and federal money service business regulations. This should also comply with Know-Your-Customer requirements, financial sanctions, and anti-money laundering legislation for the project to operate within the legal framework.

Benefits of Consumer Token Offerings (CTOs)

CTOs offer several advantages to consumers, businesses, and the broader blockchain ecosystem, providing a compelling alternative to traditional fundraising methods. Below are the key benefits of a CTO:

Legal Compliance:

They are designed in such a manner that they can easily fit within the existing legal frameworks, something that hardly ever happened with Initial Coin Offerings. This is because consumer tokens were not securities; that's why there were minimal regulatory shutdowns and/or large fines.

Reduced Speculation:

CTOs try to reduce speculative trading by prohibiting token resales. This helps maintain focus on the utility value tokens provide within a project’s ecosystem, rather than their price volatility. As a result, CTOs encourage a more engaged and sustainable user base aligned with the actual use of tokens.

Increased Accessibility:

While STOs are solely available to authorized investors, CTOs democratize access by letting the general public to participate in blockchain-related enterprises. This allows, for the first time, new opportunities in investments with a wide audience and lets them benefit from the success of blockchain initiatives.

Enhanced Transparency:

Transparency in token creation, distribution, and governance is a CTO's number one objective. Compliance with The Brooklyn Project's structure will guarantee that all stakeholders are well-informed about the non-profit programs, the team behind the project, and every usage of the token, therefore building trust and accountability.

Ecosystem Growth:

They promote growth in the blockchain ecosystem by concentrating on real-world use cases and user involvement, resulting in a feedback cycle in which the more projects that participate, the higher the potential for development, innovation, and, ultimately, blockchain technology adoption.

Final Words

CTOs represent the future of fundraising: a legally, effective, and consumer-oriented solution for entrepreneurs. Where CTO focuses on practical utility rather than speculation, it creates sustainable ecosystems that include value for businesses and customers alike. Let Osiz, the leading token development company, guide you in creating your CTO. No other team comes close to crafting state-of-the-art consumer tokens using cutting-edge technology that will keep you ahead of the crypto curve. We pride ourselves on taking the time to understand your specific business needs and design bespoke digital consumer tokens that will add real value to your brand. Leveraging rich experience and deep expertise with emerging technologies such as Hashgraph and DAG, we ensure timely project delivery by seamlessly integrating the latest developments on blockchain.