Why Most Citizenship Tokens Are Securities in Disguise

Protocols like Friend.tech and many DAO tokens bake in a direct revenue split, creating a clear expectation of profit from the efforts of others. This is a textbook security.

• Explicit Treasury Flows: Token grants direct claim on protocol fees or treasury yields.
• Passive Income Narrative: Marketing focuses on 'yield' and 'rewards,' not governance utility.
• SEC Precedent: This mirrors the LBRY case, where token functionality was deemed secondary to its profit-seeking sale.

Token value is explicitly pegged to the execution of a centralized team's roadmap, making buyers reliant on their managerial efforts.

• Vesting Schedules: Team and VC allocations create sustained selling pressure dependent on development milestones.
• Roadmap Tokenomics: Whitepapers promise specific features (e.g., Layer 2 launch, major partnership) that are sole drivers of speculated value.
• The 'Active Participant': The founding entity is unmistakably the essential third party in the Howey Test.

Projects launch with deep liquidity pools on Uniswap but treat the token primarily as a tradeable asset, not a functional key.

• Liquidity as a Feature: Primary utility is resale on secondary markets, not access or governance.
• Fragile Pegs: Many 'citizenship' tokens use bonding curves or similar mechanisms that create a direct price-to-adoption link, a hallmark of investment contracts.
• Regulator View: The SEC's case against Ripple hinged on the creation of a speculative secondary market as evidence of a security offering.

The SEC's primary hook. Most citizenship tokens are sold, not earned, creating an immediate capital contribution. The promise of future utility is used to justify the sale, but the initial transaction is purely financial.

• Key Flaw: Direct ETH/USDC payments for tokens mirror traditional securities offerings.
• Key Risk: Creates a clear 'investment of money' prong, satisfying the first element of the Howey Test.

Token value is explicitly tied to the managerial efforts of a core team building the network or platform. This creates a 'common enterprise' where profits are derived from a third party.

• Key Flaw: Roadmaps, treasury management, and protocol upgrades are centralized promoter activities.
• Key Risk: Satisfies the second and third prongs of Howey, making the token a clear investment contract.

Marketing emphasizes token price appreciation, access to future revenue shares, or staking yields—not current consumptive use. The primary purchaser motivation is financial gain.

• Key Flaw: 'Governance rights' are often a proxy for profit-sharing, as seen in cases like LBRY and Kik's Kin.
• Key Risk: Cements the fourth and final prong of the Howey Test, triggering full securities regulation.

The critical counter-example that proves the rule. UNI was distributed for past platform usage, not sold. No money was invested by recipients, breaking the first prong of Howey.

• Key Benefit: Establishes a regulatory safe harbor for genuinely retroactive, usage-based distribution.
• Key Lesson: Citizenship must be a reward for contribution, not a forward-looking financial instrument.

The SEC views most of crypto as its domain post-Ripple rulings. Citizenship tokens with treasury control, roadmaps, and token sales are low-hanging fruit for enforcement actions.

• Key Flaw: Teams believe 'decentralization theater' is a shield; the SEC examines economic reality.
• Key Risk: Leads to cease-and-desist orders, disgorgement of funds, and crippling fines.

To avoid being a security, the token must have immediate, non-speculative utility at launch and value must accrue from protocol mechanics, not promoter promises. See MakerDAO's MKR governance or true gas tokens.

• Key Benefit: Aligns with the Framework for 'Investment Contract' Analysis of Digital Assets.
• Key Action: Design for consumptive use first; any financial return must be incidental.

Tokens that grant access to protocol revenue or fee-sharing directly create an expectation of profit from the efforts of others—the core of the Howey Test. This is the primary vector for SEC classification.

• Direct Linkage: Distributing fees from a centralized treasury or a core team's work is a red flag.
• Passive Income: Staking for yield where the source is protocol fees, not peer-to-peer lending.
• Precedent: SEC vs. LBRY, Ripple hinged on this expectation.

If a token's utility or value is dependent on the ongoing, managerial efforts of a founding team or foundation, it's a security. Most DAOs fail here.

• Roadmap Dependence: Value is pegged to promised future development by a core group.
• Treasury Control: A multisig with known entities directing funds and development.
• Contrast with Bitcoin/ETH: Their value isn't derived from a specific group's promised work.

Retroactive airdrops framed as "decentralizing governance" often mask a securities distribution. If governance only controls non-essential parameters, it's not sufficient decentralization.

• Vote on Fees? Real utility. Vote on a new logo? Not utility.
• Sybil Attacks: Distribution to thousands of wallets doesn't equal decentralization if control remains centralized.
• Look to Uniswap: UNI is the canonical case study in navigating this tension post-airdrop.

Architects have two clean paths: create pure, non-financial utility or build a protocol so decentralized it has no essential managerial efforts.

• Access, Not Equity: Token as a required consumable for a service (e.g., blockchain gas).
• The Filecoin Model: Token is necessary to purchase storage, a utility divorced from protocol profit.
• Full Exit: Follow the Ethereum or Bitcoin playbook—dissolve the foundation and let the network run itself.