FTX’s exchange token, the so-called FTX Token (FTT), qualifies as a security according to the US Securities and Exchange Commission (SEC). This could have major consequences for the rest of the industry, because FTX was not the only exchange platform with its own token.
What is an effect?
We speak of an effect for US law if there is an investment contract. Basically, this means that there must be agreements or promises from the issuer about ways they intend to boost the value of the token. In the case of the FTX Token, this is clearly the case, according to the SEC. “If the demand for trading on the FTX platform increases, then the demand for the FTT could also increase, providing a financial benefit to investors in the token,” thus the SEC.
In the indictment, the SEC writes, among other things, that FTX used the proceeds from the sale of the token to fund the development of the platform, marketing, the day-to-day operations and growth of the platform. It also used language to underline that FTT was an ‘investment’ with profit potential. “The FTT filings make it clear that the efforts of the FTX management team were to drive the growth and success of the platform and the token,” the SEC document reads.
“Buy and Burn”
Buying your own tokens and then sending them to a burn address is also something the SEC mentions. It is striking that this is something that several exchange platforms do. Binance also releases a so-called burn every quarter, in which it throws millions of dollars in BNB on the digital stake. Now, according to the SEC, that seems to be an argument to qualify exchange tokens as securities.
The result of the classification as a security initially means that FTX illegally marketed a security as a company. This results in fines, because you are not allowed to just issue shares or similar items. The rules on this subject are mainly there to protect investors. Furthermore, exchange platforms are not allowed to list securities just like that, there is a chance that all tokens that are classified as securities by the SEC will disappear from the exchange platforms.
This could mean, among other things, that XRP will eventually disappear from all exchange platforms. Ripple Labs has been battling the SEC for years over the latter claiming that XRP qualifies as a security. Should the court come to the same verdict, the exchanges will probably remove XRP from their platforms soon. You are not allowed to list securities without a license.