April 30 2021
After many conversations with Vault Guardian Token (VGT) investors and our advisory board, the Vault12 team is proposing changes to the functionality of the Vault token economy to maximize adoption and efficiency of the upcoming Vault Platform. In this paper, we review the legal and technical facts that influenced our decision.
The Vault12 team recommends the VGT community adopt the "Transaction Split" proposal as the new policy of Vault platform. This and two alternative proposals will be oﬀered as a public vote to VGT owners and will be conducted on the ETH mainnet in a few weeks time.
Legal considerations for Security Tokens
It has been well over a year since we published the Vault12 white paper and shared our vision of a distributed secret-keeping platform to secure our most valuable crypto assets and most critical documents. Security tokens were in their infancy, and there was little guidance on how security tokens could operate in distributed software platforms.
Over the last year, the landscape has changed dramatically — but not necessarily in a direction that reduces complexity and enables widespread adoption of security tokens. In the US, the SEC has not made concrete moves to simplify mass-market usability of tokens, by specifying a clear migration path for how security tokens, issued for initial fundraising, can be re-categorized as utility tokens for distributed software platforms that are being built using these funds.
Recent commentary from the SEC indicates that tokens used for fundraising remain designated as securities, but tokens which are only used on a launched platform and not used for fundraising can be legitimate utility tokens.
We had hoped to see clear legal guidance on how security tokens can transition into the category of utility tokens, and therefore be used by potentially millions of customers of our platform. Unfortunately, such roadmap still does not yet exist, and it is unclear when or if it will ever be published.
Security tokens even of functional, launched platforms remain regulated as securities in the United States, and therefore any customer who wishes to use a platform powered by security tokens must pass accreditation and KYC checks that are usually required only of professional investors.
An application user who wants to spend $100 in a mobile app is an entirely diﬀerent category of customer than a token investor who wants to purchase $100,000 worth of tokens and profit from their growth, yet in today's legal reality in the US they are treated exactly the same.
The legal framework is woefully outdated compared to the practical needs of token-powered software platforms, yet US-based companies have no choice but to operate within the confines of such a legal framework.
Unfortunately, the end result is that using security tokens on platforms greatly limits the reach of the platform for residents of the United States and makes US-based companies less competitive in the global market.
The Vault Platform is just a few months away from public launch and currently undergoing final beta testing (register for the Beta app). While international customers will be able to buy VGT tokens and use the platform right away via international exchanges, close to 90% of US customers will be unable to purchase security tokens and use the product we spent years creating. Of course, we can just block all US customers and wait until the legal fog clears, but that might take many years and will prevent us from oﬀering our product to one of the largest markets in the world.
Since we want the Vault platform to become a global standard for secure storage of all critical digital assets for every person on the planet, we need to find a path to overcome that obstacle and open up our app to millions of customers in the United States.
To solve these challenges, over the past few months we have conducted a number of brainstorming sessions with our largest institutional investors and company advisors. Based on many hours of discussions and brainstorming, the Vault12 team recommends we adopt Transaction Split as the future policy of the Vault platform. During these discussions, another alternative option of 'Dual Token' model had surfaced but ultimately did not gather as much support as the 'Transaction Split' idea. Let's review both proposals.
1. Transaction Split
Key Goal: Optimize for ease of use and reach for app customers
Providing app customers with VGT tokens will be heavily restricted as long as tokens remain categorized as a security. The task of categorizing VGT as a utility might take years and may depend on regulations that are not yet issued.
Instead, we can make the platform accept the widely available Ethereum (and other cryptocurrencies at a later date) and keep the original VGT token as a registration of commercial rights on the platform. This way millions of Ethereum users can immediately use the Vault platform with no extra steps such as buying tokens on exchanges. At the same time, VGT tokens become valuable since ownership entitles holders to automatically receive a piece of each transaction that takes place on the platform.
As you might recall from our white paper, Vault platform will be powered by following three transaction groups:
We propose a flat, 20% transaction split to be implemented by all elements of our platform stack.
Anatomy of Transaction Split
Here are the main consequences of this policy:
- Any Ethereum owner will be able to use the Vault12 application immediately.
- Ownership of VGT tokens will become an instrument to receive a steady flow of Ethereum proportional to transaction volume taking place on the platform. At later date, any ETH-convertible cryptocurrency will be acceptable as platform payment and will accrue to VGT owners with same 20% split.
- Currently, external investors and advisors control ~82% of all unlocked VGT tokens and therefore will receive ~82% of ETH received in transaction splits. (See token distribution report).
- VGT tokens will remain a security, but owning VGT token will no longer be a requirement to use the Vault Platform and end-user products.
- VGT tokens will be tradable only on security exchanges. US residents who wish to buy VGT tokens will have to remain compliant with KYC/accreditation regulations.
As token scarcity becomes a desirable property of the platform. Vault12 will provision a buy & burn smart contract that will spend 10% of the previous month's fees to purchase and permanently burn VGT tokens until the total number of provisioned VGT tokens falls to 100,000,000 (one hundred million) tokens. All monthly burns will be inspectable on the mainnet.
2. Dual Token Structure
Key Goal: Make the distribution of application tokens easier.
An alternative approach is to cleanly separate the role of the token as fundraising instrument (an activity which is now in the past and completed via the original VGT token) and create a utility token as an application resource bought by users to access the platform. VGT will remain the original security token that will keep all original functions. VGT will get one new additional function: it can be used for a one-way burn into 'VGU': Vault Guardian Utility token. VGU can be created by one and only one method: a one-way burn of one VGT token into one VGU token.
Since the attributes that make tokens a security for original VGT are well known, we can restrict such features in utility conversion form of VGU. This way we can cleanly separate qualified investors (who need access to a speculative instrument of VGT that can be bought/sold for the goals of investment growth) and application users who need small dollar amounts of tokens to power application usage via VGU.
The Vault Platform can be powered by a dual-token structure: an initial token representing an investment instrument, and a utility token (that can be only generated by existing investors by converting their investment tokens) that is designed for small-denomination application usage.
Here how this will look in practice:
Ultimately, this proposal did not generate as much enthusiasm from our investors as the Transaction Split model. The Dual token approach solves the issue of a wide distribution of our token on utility exchanges but introduces an extra layer of complexity for the application usage. Now users need to understand the concept of two separate yet related tokens and figure out the correct exchange to buy the correct token they need for actual usage. That level of complexity might be too hard for the average user and might lead to decreased adoption of the product.
Vault12 Team Recommendation
It is essential to understand one important fact: the value of the token will be solely derived from the success of Vault12 end-user products and platform. Each of these proposals has a good chance to work well, yet both depend on the mass market success of our first end-user application.
On a fundamental level, the Transaction Split and Dual Token proposals are going after mass market distribution in diﬀerent ways.
- Transaction Split: makes the application itself accessible to a pre-existing market of Ethereum owners. We get millions of potential customers from day one, at the cost of giving up the potential to create awareness for our token on various utility exchanges.
- Dual Token: makes the application token accessible and converts any utility exchange we list on into a marketing channel for our upcoming future applications. We gain marketing exposure and access to users at the cost of additional complexity and friction inside the product with a dual-token structure.
The hardest part of the growth of any consumer-facing platform is getting a critical number of users onboard quickly. Removing the dual-token barrier from the understanding of application UI and recruiting ETH owners to instantly use the platform, in our opinion, far outweighs the benefits of getting bigger market awareness from listing VGU token on utility exchanges.
We think reducing the complexity of the application experience and getting access to all existing holders of Ethereum represents a better and faster opportunity to establish a high rate of growth and broad distribution of the Vault Platform and end-user applications. It creates additional value to token owners by converting tokens into a value-generating asset. Based on these arguments, we believe Transaction Split is the best strategy for Vault Platform.
VGT Owner Blockchain Policy Vote
These proposals require a change to the vision laid out in our white paper last year. We are going to ask our community of VGT owners to vote on what they think is the best possible way forward. In a few weeks time, we will run a blockchain vote by VGT token owners whose tokens are unlocked and can sign transaction verifying their VGT ownership on ETH mainnet.
We will oﬀer the following three policy options to current VGT owners. Only owners with unlocked tokens will be able to participate, and, consequently, all Vault12's locked tokens will be recused from this voting.
- Transaction split. This proposal leverages the security basis of the VGT token and switches its function from application currency to representation of commercial rights on the platform.
- Dual Token. This proposal constructs a new token specifically designed and categorized as a utility token and would become the main transactional token of Vault Platform.
- No Change. This vote means the community prefers to keep VGT token to the exact policy described in our white paper. International customers will be able to buy/sell tokens with minimal complications, yet in US sales of VGT Tokens will be restricted to US-accredited investors only (same as the STO). VGT token will only be listed on security-token compliant exchanges. Practically it means the exclusion of the US market from Vault12 products powered by VGT token.
- Each unlocked owner of VGT can participate in the vote on the Ethereum mainnet. One token grants one vote.
- There will be at most ~267.2M tokens eligible to vote. The exact number will change during the year as investors and advisors tokens come out of smart contract lockup.
- The vote will be binding if 100M or more tokens participate in the vote.
- If less than 100M tokens will participate in the vote, Vault12 will adopt the "Transaction Split" proposal as the default outcome based on team & advisory board recommendation.
- If 100M or more tokens participate in the vote, Vault12 will adopt the vote resolution that gains the majority of votes cast as long as such majority is more than 10% higher than the 2nd place proposal.
- If the first and second place proposals are within 10% of each other, Vault12 will organize a second round of voting and winners will be determined by a simple majority of votes cast.
Example #1: Proposals A/B/C gain 10%/20%/70% of the vote. Proposal C will be adopted.
Example #2: Proposals if A/B/C gain 20%/35%/45% of the vote. B and C are within 10% of each other, Vault12 will organize second runoﬀ round between B and C, and the simple majority winner will be the adopted policy.
The Vault12 project began in 2015: in less than a year we released our secure relay infrastructure, and a few months later the first prototype app in 2016. To raise funds and to take the platform to market, we published our white paper and strategy in 2018, and executed a compliant security token offering, followed swiftly by an alpha release of the product. In March of 2019, we started the Beta program which will culminate in the release of the product in Summer 2019.
This is for sure progress, however, for Vault12, one of the first companies to launch a platform in 2019 that implements the tenets of blockchain, distributed, and decentralized apps, this requires re-thinking the way our token economy operates. As this requires a change to our vision laid out in our white paper, we ask our community to vote on the best possible way forward.
We believe that changing how tokens are used inside the Vault platform will be hugely beneficial to you and your network of Guardians, as well as adoption around the world. We are excited to be one of the first to conduct a community-led blockchain vote and look forward to our upcoming launch in the summer of 2019. Please Vote.
Thanks to Blake Commagere.