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The Emergence of Personal Tokens & Their Impact

The Emergence of Personal Tokens & Their Impact

Discover personal tokens, why you might use them, their potential risks and challenges, and whether they will take hold to become a mainstay for the creator economy.

The decentralized finance (DeFi) ecosystem has introduced innovations to the financial services industry – but the idea of a “human IPO” is perhaps one of the most unusual DeFi applications. “Personal tokens” have become a popular way for content creators and influencers to raise money and engage with their audiences in new and exciting ways – but there are risks.

In this article, we’ll look at personal tokens, examples of popular tokens, and some risks to remember before issuing or purchasing them.

What Are Personal Tokens?

Personal tokens are ERC-20 or similar tokens – typically on Ethereum – controlled by a single individual. Token holders might be able to vote on life decisions or exchange the tokens for services. And in exchange for tokenizing themselves, these individuals can build an audience and raise money to finance things like their education or projects they’re working on.

In some ways, personal tokens are similar to platforms like Patreon that enable anyone to support anyone else in their work. For example, many artists use Patreon to encourage their fans to support their work without necessarily selling artwork outright. And open-source developers use the platform to raise money for their free, public code contributions.

The difference is that personal tokens introduce more economic possibilities. Token issuers can design smart contracts to deliver specific benefits while controlling the supply and demand of their tokens. For instance, they might design a smart contract that limits the number of possible tokens and then burn them when used for consulting services.

Why Would You Create One?

Like most crypto projects, personal tokens have lofty ambitions to flip conventional concepts on their heads and transform how people do business and interact.

In theory, a personal token backed by your time that trades in a free market would tell you exactly how much your time is worth. Instead of salary negotiations, you could benefit from the real-time value a buyer believes your time is worth. If you sell a service for 100 tokens, the U.S. dollar value would auto-adjust depending on the value of those services to buyers.

Personal tokens also enable content creators to connect more with their audiences. For instance, an influencer might create a token that provides access to an exclusive Discord group for a month or year. These capabilities could help them generate income to support their activities while delivering value to their audiences.

Examples of Personal Tokens

Many high-profile personal tokens have hit the market with varying success levels and ups and downs.

You can exchange Kerman Kohli’s $KERMAN token for access to his Telegram group, subscriptions to his DeFi newsletter, or access to his personal time. Moreover, he plans on burning tokens used to purchase his time and buy back circulating tokens with 5% of the revenue from his newsletter – efforts designed to create scarcity and potentially increase the price.

On the other hand, Alex Masmej’s $ALEX token grants access to his time and non-binding votes over his life decisions. He also promised to distribute 15% of all income he makes over the three years following the launch – capped at $100,000 – distributed quarterly in DAI or an equivalent stablecoin. As a result, it’s more of an income-sharing agreement or, as he puts it, a human IPO.

Examples of Personal Tokens
Roll makes it easy for anyone to mint personal tokens and leverage them to provide access to exclusive content. Source: Roll

Platforms like Roll promise to make personal tokens more accessible by automating the process of creating and managing them. The Roll platform also supports creating a market on decentralized exchanges (DEXs) like Uniswap or SushiSwap and increasing liquidity with Roll Staking. And Web3 memberships make it easy to integrate with other platforms and tools.

Are Personal Tokens Legal?

The Securities and Exchange Commission (SEC) has been cracking down on many ICOs, calling them unregistered securities offerings. Last year, the agency brought 46 enforcement actions against ICOs, representing about $3 billion in potential fines and penalties. And recently, it began hiring new attorneys to step up its enforcement of these rules and regulations.

In the case of tokens like $ALEX, these offerings are textbook securities. The Howey test defines “securities” as an investment of money in a common enterprise with the expectation of profit to be derived primarily from the efforts of others. Any promise to distribute income from the work of an individual issuer to token holders certainly meets these criteria.

However, personal tokens that don’t distribute income likely don’t qualify as “securities” and aren’t subject to the SEC’s oversight. Roll, a DeFi platform allowing users to launch “digital community offerings,” sees them as a crowdfunding mechanism enabling buyers to access content in much the same way as platforms like Patreon.

Other Risks & Challenges

Personal tokens also carry more risk for buyers than conventional crypto tokens since they rely on an individual rather than an institution. If the individual changes their mind or experiences a life-changing event, token holders have little recourse to recapture value and could lose their entire investment in the token (if it held any economic value in the first place).

For those issuing personal tokens, the proceeds from an ICO typically qualify as ordinary income in the eyes of the IRS. You may need to report this income on Form 1040 Schedule C or elsewhere, depending on how you structure your business. Moreover, you may need to report the U.S. dollar value as income if you accept tokens in exchange for services.

And finally, there’s the issue of liquidity. If you price your services in personal tokens rather than U.S. dollars or native currencies, you might be on the hook for delivering those services regardless of the U.S. dollar price of your token. And that might not be sustainable depending on the cost of the service or your income requirements.

What’s Next?

The number of new personal tokens and the growth of existing tokens has tapered off in recent years as the novelty has worn off and the DeFi ecosystem experienced a slowdown. But some of these tokens remain very popular, and new platforms promise to make them easier to issue, potentially expanding the number of tokens over time.

On a broader level, personal tokens continue to push the bounds of DeFi possibilities. While the legality of some is questionable, there’s little doubt that they could become a powerful tool for content creators and influencers to engage with their audiences. And the concepts behind them could bleed into other parts of the DeFi ecosystem, like Soulbound tokens.

The Bottom Line

Personal tokens have been popular over the past few years as the DeFi ecosystem has grown, allowing individuals to raise money and deliver unique benefits to their audiences. However, issuers and purchasers of these tokens should pay close attention to some significant regulatory caveats and risks to avoid potentially costly problems.

If you trade crypto assets, ZenLedger can help you stay organized for tax time. Our platform automatically aggregates transactions across your wallets and exchanges, computes your capital gain or loss, and generates the paperwork you need to file. This paperwork includes personal tokens you issue or purchase and the income or loss they generate.

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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Justin Kuepper