An exploratory looks at a potential self-regulation framework for issuers of digital coins and tokens.

1. Digital Tokens: Accountability
& Transparency Framework
Mutuality Analytics
DRAFT January 2018

2. Overview
• Scope
• Terminology
• Speculative Utility Cycle
• Token Classification & Status
• Applications of Common Framework
• Common Application Standards
• Common Network Reporting Standards
• Tokens as Debt Instruments

3. Scope
• The scope of this document and its analysis is limited to the
exploration of a token issuer accountability & transparency
framework
• It is presented on a “blank slate” basis
• It does not address:
• Underlying technology that might enable or streamline the application,
execution, and enforcement of the framework discussed
• Opinions regarding the effect or application of existing securities laws
on tokens
• Requirements and responsibilities of ICO investors and other
tokenholders (e.g., wealth, income, sophistication, etc.)

4. Terminology
Issuer: Sponsoring person(s) or entity raising capital via initial coin offering (ICO).
Liquid: Exchange-traded on approved exchanges legally accessible by [%] of tokenholders in their local
jurisdictions (when threshold is not met, a token is considered Illiquid).
Publicly Available Technology (PAT): An operable network product or service that is available for public
download and use (Note: proof-of-concept, alpha, and beta products/services do not qualify as PAT)
Definite-Lived: Asset that has a fixed or readily determinable life, either based on the passage of time or use of its
functionality.
Indefinite-Lived: Asset that does not have a fixed or readily determinable life because it does not expire or its
expiration cannot be reasonable estimated.
Direct Exchange of Value: Transactional event in which an asset is transferred for the purpose of changing the
ownership of that asset.
Indirect Exchange of Value: Transactional event in which an asset is transferred or utilized to effect a Direct
Exchange of Value

5. Token Economics
(More) Easily Quantifiable Difficult to Quantify
Supply curve Market feasibility
Issuer & affiliate incentives Execution risk
Velocity
Utility demand
• Supply side economics are generally easier to quantify than
demand side, especially in pre-functional applications
• How do we democratize the demand side risks in a self-
regulating environment?

6. Speculative Utility Cycle
Pre-functional [Utility] Functional
-[Speculation]+
Highest Risk
Lowest Risk

7. Token Classification & Status
Common Framework

8. Token Classification Tree
Utility
License Consumable
Non-Utility
Currency
Representative
Ownership
Security
Non-Security

9. Token Classifications Defined
Token
Classification
Characterized By Example
Utility
License • Indefinite-lived
• Grants network service “use rights”
• Primary use as indirect exchange of value
• Can be utilized by tokenholder or resold to
other users on a per use or per license basis
BlockMason Credit Protocol
Consumable • May be designed for indirect or direct
exchange of value
• Contain high-velocity design features making
it improbable and uneconomical to hold and
store long-term, e.g.:
• Hyperinflationary
• Definite-lived (depreciating)
• Limited-use currency
Basic Attention Token
Non-Utility
Currency • Indefinite-lived
• Primary use as direct exchange of value
Bitcoin
Representative
Ownership
• May be definite-lived or indefinite-lived
• Grants representative ownership of underlying
asset to holder
• May or may not be in common enterprise
(securities law consideration)
The DAO (security)
[TBD] Real Property Title Tokens (non-
security)

10. Token Status
Status Name Liquid Publicly Available
Technology
Pre-Functional w/o Secondary Market N N
Pre-Functional w/ Secondary Market Y N
Functional w/o Secondary Market N Y
Functional w/ Secondary Market Y Y

11. (A)
Representative
Ownership
(B)
Currency
(C)
License
(D)
Consumable
(1)
Pre-Functional
w/o Secondary
Mkt
A1 B1 C1 D1
(2)
Pre-Functional
w/ Secondary
Mkt
A2 B2 C2 D2
(3)
Functional w/o
Secondary Mkt
A3 B3 C3 D3
(4)
Functional w/
Secondary Mkt
A4 B4 C4 D4
Classification Status Rating Matrix

12. Classification Status Rating (CSR)
• While not prohibited or precluded, changes in Token
Classification Rating are generally expected to occur rarely
• Token Status Rating will generally evolve from 1 through 4 as
projects mature, however it is possible to go backwards
• For example, in the event of de-listing tokens from major exchanges
• Higher status rating=further dev progress+liquidity=lower risk

13. Applications of Common
Framework

14. Common Application Standards
All Issuers must report prior to token offering:
• Token Classification Status Rating at issue
• Rating affirmation (legal opinion, independent validation, etc.)
• Project development roadmap, including:
• Key development milestones and targeted completion dates as defined by project
team
• Expected corresponding Token Classification Status Rating changes
• Supply mechanisms
• Issuer & affiliate incentives
• Others?

15. Common Network Reporting Standards
All Issuers must make available to the public on an inception-to-date
basis no less frequently than daily:
1. Number of addresses/wallets/users
2. Number of issuer-linked addresses/wallets and balances held. Hidden or
undisclosed issuer-linked wallets are strictly prohibited.
3. Number of daily transactions processed
4. Volume of daily transactions in local currency
5. Exchange-traded volume in local currency across listed exchanges (for
Status Classifications 2 and 4)
6. Token supply
7. Any fundamental data off of which dynamic supply mechanisms are based
8. Others?

16. Observations & Self-Regulation Layers
• Post-ICO launch reporting
• Trust fund lock-up with
milestone trigger releases
• Distributed data libraries
• Smart legal contracts
(enforcement)
• Bifurcation of pre-functional
and functional tokens
Airswap: https://goo.gl/aRPXe6
Blockstack: https://goo.gl/ooZ9VQ
Messari: www.messari.io
Mattereum: www.mattereum.com
OpenLaw: www.openlaw.io
SAFT: www.saftproject.com

17. Tokens as Debt Instruments
• Pre-functional token sales in early stage ventures represent a
future obligation from the Issuer to the Tokenholder:
Issuer Tokenholder
Capital
Tech Enabling Future
Function (Value)
• In other words, the value of the token at issuance is based on
the expectation of future utility and function that does not yet
exist

18. Tokens as Debt Instruments
• This dynamic creates a reliance on the Issuer by the
Tokenholder to perform under the conditions of the token
issuance, whether implied or explicit
• The Tokenholder is powerless in their reliance on the Issuer
because he or she has no voting right to influence the Issuer
team or governance process, which is typically a remedy
reserved for equityholders
• Therefore, such tokens are more akin to debt instruments than
equity instruments, and should be treated in a similar fashion
• The SAFT model is consistent with this thinking

19. Tokens as Debt Q&A
If tokens are debt, what is the principal to be repaid?
Token sales are most like PIK (payment in-kind) loans. These instruments are typically very high-risk, unsecured,
deeply subordinated, and do not pay cash flows during the loan period. In addition, interest and/or principal is paid
in-kind. The SAFT model follows this logic in that the SAFT represents a security interest in a future token. The
SAFT obligation is settled when a functional token is delivered to the SAFT-holder.
How can you have debt without interest?
Zero-coupon bonds are not uncommon.
What would be considered an event of default on a token?
Issuer covenants, and therefore default events, would be determined by the Issuer and their advisors on a per
issuance basis. It is likely over time that standard industry covenants would emerge as they have in other debt
markets. Capable and seasoned issuer teams would do well to offer better protections to their prospective
investors as this would enhance project legitimacy and attract higher levels of committed capital. Token covenants
could also be dynamically linked to the token’s CSR, such that certain covenants only apply at certain rating levels.
How would covenants and default be enforced?
That is outside the scope of this analysis and exploration. It may be that the debt is enforced via traditional
methods early on, but tools and services emerge in the future that enable certain levels of on-chain enforcement.

20. Tokens as Debt Q&A (cont’d…)
What happens when a token defaults?
Similar to defining the covenants, Issuers would also define the remedies available to tokenholders in the event of
default. Again, these could be covenant-specific, but could include various forms of return-of-funds. Such
provisions could be secured, either in part or in full, by a trust fund lock-up mechanism.
What happens if a capable and well-intentioned Issuer defaults but the tokeholders want the project to
continue?
In the world of corporate debt, issuers can solicit their bondholders to amend the terms of the bond indenture. This
could also be an option in the world of digital tokens. In addition, Issuers could offer a new token to current and
new prospective tokenholders, subsequently using a portion of the funds raised to settle any outstanding claims on
the previous token. This would be the digital token equivalent of a “refinancing”, but would raise other
complications that would need to be explored further.

21. Discuss
Debate
Revise
Repeat
Thank You

22. About Mutuality Analytics
Mutuality Analytics is a research-based information and advisory
service providing insights into decentralized network
fundamentals, price discovery, and digital asset accountability.
Visit us at www.mutuality.io to learn more.
Disclaimer: Mutuality Solutions is not a certified public accounting firm, law office, or registered securities broker. As such, it does not provide professional advice to any
person or entity in these capacities. Its research, analysis, and publications represent only its opinions, which are intended solely for qualified individuals and
institutions with experience in investments, decentralized network technology, and token economics, and should not be considered endorsements of any kind. Investing
in digital assets involves significant risk and may result in partial or total loss of invested capital. Always consult licensed professionals prior to making investment
decisions.