In our first of this new series, Lightning Token Law Review, we offer a rapid fire review of Colorado’s new digital token law.
Name: Colorado Digital Token Act
Concerning: Exemptions from the securities laws for cryptocurrencies
Why: The costs and complexities of state securities registration can outweigh the benefits to Colorado businesses using cryptoeconomic systems that seek to raise growth capital and create new decentralized internet platforms and applications by offering the sale or transfer of digital tokens that have a primarily consumptive purpose.
What: Essentially, an issuer may sell digital tokens exempt from registration under CO securities laws if the token will be used primarily for consumptive use and takes actions that reflect such intent. Additionally, a person that effects a transfer, sale, or offer of consumptive use tokens is exempt from state broker-dealer regulations.
- Issuer Exemption– An offer or sale of digital tokens is exempt from Colorado registration requirements if (1) issuer files a notice of intent with the Commissioner; (2) the primary purpose of the token is consumptive use; (3) the token is marketed by the issuer as a token to be used for consumptive use rather than speculative investment; (4) the consumptive use of the token is available at the time of the sale or all of the following conditions are met:
- consumptive purpose available within 180 days after sale or transfer of digital token;
- initial buyer is prohibited from transferring digital token until consumptive purpose is available; AND
iii. initial buyer acknowledges purchase is for consumptive use and not speculative investment.
- Licensing Exemption– a person that effects transfers, sales, or offers of tokens that qualify as consumptive use tokens must file a notice with the Commissioner prior to conducting any token-related activities.
- Consumptive Purpose Definition: “Consumptive purpose” means to provide or receive goods, services, or content, including access to goods, services, or content.
- Digital Token Definition: “DIGITAL TOKEN” means a digital unit that is:
(A) in response to the verification or collection of a specified number of transactions relating to a digital ledger or database;
(B) by deploying computer code to a blockchain network that allows for the creation of digital tokens or other units; or
(C) using any combination of the methods specified in subsections (4)(b)(i)(a) and (4)(b)(i)(b) of this section;
(II) recorded in a digital ledger or database that is chronological, consensus-based, decentralized, and mathematically verified in nature, especially relating to the supply of units and their distribution; and
(III) capable of being traded or transferred between persons without an intermediary or custodian of value.
This definition models part of the Token Taxonomy Act, which we discussed in an earlier blog post. Notably, under the Token Taxonomy Act’s definition, “digital token” is not a token that represents a financial interest in a company. The Colorado Act does not exclude such tokens from its definition, but the consumptive use requirements likely provide the same result. In other words, if a purchaser receives a financial interest in a company by virtue of purchasing a token, the issuer will be hard pressed to argue the token is aimed to be used primarily for consumptive use.