When is My Colored Coin a Security?

by George Barclay

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Elaine asks:
I want to raise a pig so I can have some bacon. Now, I can’t eat a WHOLE pig (well I probably can, but I shouldn’t) so I issued some PiggyCoins on Coinprism. Each PiggyCoin represents some part of the pig, and holders of my PiggyCoins get some bacon when the pig is fully ripened.

If these PiggyCoins can be transferred prior to slaughter for realized gains, does that mean my pig is a security? What if I’m not raising a pig, but just making some potato salad? Or selling hashing power on my mining rig?

Pork is a commodity, and commodities are not considered securities. There are three tests to determine when an investment contract is a security. They are:

  • Is it an investment of money?
  • Is it in a common enterprise?
  • Are its profits to come solely from the efforts of others?
  • Commodities do not satisfy the third point because you are delivering bacon, not money. Profits are realized by selling the bacon.

    Now, if I were to issue a PiggyCoin derivative, say a PiggyOptionCoin, then that would be a security. The performance of my OptionCoin is dependent on the activities of a third party. Someone else sells the bacon.

    As you pointed out earlier, you could offer, sell, settle the PiggyOptionCoin in bitcoin. According to the CFTC, bitcoin is a commodity. Therefore you would be delivering a commodity, not money.

    Update: But in the case of SEC v. Shavers and Bitcoin Savings and Trust, it was determined that bitcoin is a currency or form of money. I don’t know the answer to this one – only one way to find out!

    Disclaimer: I am not a lawyer, and you really shouldn’t trust the internet for legal advice.

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