In a previous blog, our team member Dorcas Wokocha had described memecoins in detail. While her focus was on the ones who promise returns and talk about profits, mine is on the ones that are purely utility tokens. These are the ones that are created to provide users with future access to a product (a MFT) or service. They are not designed as investments but as a means to gain access to a network's functionality. They often serve as native currencies within a blockchain platform, enabling users to perform actions like purchasing services, accessing features, or voting on governance issues.
The first MFT on the market was NPC token. I will use them as an example in this article because they are a clear cut utility token and because in my free time I engage in art activities. As a mompreneur, my engagement in art does not happen very often, but in principle it makes me appreciate NFTs and MFTs for their artistic purpose.
In contrast to other meme projects, there is no “price talk” or promises of the "moon" via the NPC developers, the NPC website or official social media accounts. It is clearly written all over their website and social media accounts few times that:
“This token is simply an art experiment paying homage to a meme most of us love and recognize. NPC and NPC MFT are a meme coin and fun NFT hybrid with no intrinsic value or expectation of financial return. There is no formal team and no roadmap. The coin and art are completely useless and for entertainment purposes only.”
The NPC utility token takes me back to when I was a teenager and we used to collect beautiful sheets of paper that smelled like perfume and had cute cartoon characters on them. We used to exchange them with our classmates. No lunch money was involved in that exchange but I have to assure you that those exchanges were really valuable to us and were done on a daily basis.
Now, to go back to being a serious tax lawyer :)...
What is a Memecoin-NFT Hybrid a.k.a Meme Fungible Token (or MFT)?
A memecoin-NFT hybrid is where a token functions both as a standard ERC20 token and an ERC1155 NFT. Users can convert between the two formats at a 1:1 ratio using the dedicated dApp. NPC holders can easily switch (respawn <-> transform) between token standards, which further supports the idea that it is not a security token.
Holders of the token can use it to perform functions within the ecosystem it supports. Such tokens are marketed primarily for its utility rather than potential financial gains. Here it should be duly noted that there is no central marketing team, rather the community (which is all over the world) promotes the token as a hobby activity.
There is no identifiable group that is providing essential managerial efforts that affect the token's success. The security of the Telegram channel is safeguarded by a bot (SafeguardRobot).
The value and success of NPC rely on the collective efforts of the community (e.g. almost 10,000 people on Telegram). The ideal community is all human beings on earth and therefore 8 billion people are allowed to join the initiative. Therefore, NPC does not match the criteria derived from the efforts of others according to the Howey test.
The Twitter account of NPC clarifies this by showing that there are 3952 posts (September 2024) from 23,600 community members.
The less the token relies on the promoter's efforts, the less likely it is to be a security.
Both the Howey Test and Hinman's criteria focus on: the efforts of others and the expectation of profits. These are central to determining if an investment contract exists. Whether investors anticipate returns from the promoter's efforts is overlapping in both tests. NPC clearly does not answer the requirements of these criteria.
It should be duly noted that the Howey Test is a static application. It evaluates the investment at the time of the transaction. Therefore, in order to satisfy the criteria of all jurisdictions the NPC initiative might come in contact with, the Hinman test should also be applied. The reason both tests are always applied together is because the Howey Test does not explicitly consider decentralization and Hinman places significant weight on the level of decentralization.
Since this is a blog, I will not go into a legal opinion and explain in detail why NPC token FAILS both Howey and Hinmann test. However, please note that I have performed extensive analysis for both tests and indeed this MFT is classified as a utility token. NPC FAILS both tests. Ironically, these are tests you would like to fail as a Web3 project most of the time.
I have also compared and contrasted NPC tokens to other utility tokens that were already proclaimed as such. Basic Attention Token, Golem Network Token, Filecoin, and Chainlink serve functional purposes within their respective ecosystems. They enable access to services, facilitate transactions, and empower decentralized applications, focusing on enhancing efficiency, privacy, and innovation. They match the characteristics of the NPC Token.
Utility tokens (such as NPC), issued in closed-loop systems aimed at digitally providing access to applications, services or resources on the blockchain (like currency in a video game or tokenized frequent flyer miles), are possible examples of cryptoassets excluded from the scope of DAC8, as they cannot be used for general payment or investment purposes.
NPC is not designed or meant to be used for payments in any way. Neither is it designed to have a stable market value. The possibility of using NPC to receive MFT from the Open Sea marketplace does not constitute any legal rights for its owners in any way. It also does not give any voting or governance rights, nor does it give any rights concerning redemption in any form or guarantee a stable value. NPC tokens do not by any means represent a claim on any legal entity that might be established.
Even if a jurisdiction decides to take the extreme stance and classify token ownership as share ownership, it can be clearly seen in Etherscan that no token holder has more than 2.1% of the token distribution. The top three “holders” are the liquidity pool within the exchanges, NPCs own pool and the token bridge. The latter three serve as a medium of exchange or storage and possess no ownership rights. It should be underlined that the NPC community itself would have immediately reacted, if there were one or few specific wallets owning a large number of tokens. The latter stems from the aim of the project to be available to as many people as possible.
Bubblemaps and Tokensniffer paint the same picture of decentralization:
Some technical know-how is required for end-users to benefit from the NPC’s MFT. However, no investment knowledge is needed to participate in the initiative, since it is a well known fact that meme coins are just for fun and do not bring any profit. NPC Tokens play a quintessential role in the functioning of the MFTs because participants may get access to services only using NPC Tokens. The NPC Community is not occupied with ownership of products or increasing shareholder value. No equity is sold. Instead, they are outwardly focused on having a positive impact on the world and having fun through experimenting and exploring the possibilities that are provided by smart contracts and blockchain.
MFTs, NFTs and other (utility) tokens are interesting for tax lawyers and tax authorities for another reason : VAT. There was a recent viral post on LinkedIn, which I am sure most of you missed. But it made a lot of tax lawyers laugh-cry. It was about VAT on hot and cold drinks. VAT is already a nightmare or at best headache for most business owners. When it comes to crypto, VAT has the same horror effect as the Terrifier movie franchise. I have spent hours in the IBFD library and databases to get to the bottom of this, but I have figured out a way to know when VAT is applicable to utility tokens and when not. You can read more about it in my next blog in December 2024.
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