The crypto community is growing quickly and determining whether a company or project is legitimate or not is a huge challenge for investors and crypto holders. Having a legal framework in place allows both internal and external stakeholders to trust that crypto companies are more than just another pump and dump scheme.

As a relatively new industry, gaining legitimacy is extremely important to any company that engages or plans to engage in the crypto business. There are a lot of sketchy fly-by-night crypto projects out there. Crypto projects that want to prove to their potential buyers and holders that they’re more than another pump and dump need to find ways to prove their legitimacy while minimizing their risk of regulatory enforcement.

The best way to show legitimacy would be to obtain direct government approval. But let’s face it, it’s going to take a lot of time for government regulators in most countries to acclimate to crypto. Clear-cut laws and regulations on this matter are not coming anytime soon.

Hence, until a more well-defined and consistent legal framework is established, crypto companies will have to build it themselves by adopting appropriate legal solutions. Through this process, crypto companies will then be able to demonstrate trustworthiness and legitimacy to different sectors and groups. We discuss more about how this can be done for each group of stakeholders below.

Legitimacy for investors

Investors need to be assured that the crypto project that they are putting their money into is not a scam. For this group of people, protection against possible fraud is of utmost importance.

A company can have the most promising white paper out there, but without the necessary legal assurances, people will be reluctant to invest in it. Considering the recent trend of large-scale crypto scams as well as the uncertainty of crypto regulatory crackdowns, this fear and reluctance are understandable.

Standardized legal agreements like a Simple Agreement for Future Tokens (SAFT) help address this concern by providing certain legal protections to investments in the token project. This builds confidence among investors and dispels any remaining doubt as to the project’s legitimacy.

Legitimacy for workers, employees, and contributors

People who work for crypto companies or a specific project also need a guarantee. While these types of stakeholders do not invest money, they pour time and effort into making sure that their crypto project becomes successful.

Legal solutions like Uptoken from Upstock give workers, contributors, and other internal stakeholders the assurance they need that they are working for a legitimate crypto project and that they will be rewarded once it becomes a success. Uptoken uses restricted token units (RTUs) to do this by using a contractual promise to pay out tokens to qualified workers once certain milestones or a specific condition is met (such as a “liquidity event” like an ICO).

Sure, the company may be paying them a salary. But legitimacy is still important. Workers and employees, for instance, want to take pride in their work. No one wants to be associated with a shady company. Legal frameworks and solutions help remove these doubts and allow workers to more easily trust the company.

Legitimacy for token holders

Token holders are end-users that share similar interests with more sophisticated investors. Legitimacy and fraud protection is also important to them. To some extent, they can be considered as “retail investors” who invest in the coin or token after its development and issuance. This is especially true for those who buy and hold the token or coin with the hope that they can sell it at a higher price than when they bought it.

Often, token holders must rely on whitepapers and company updates to determine whether or not a company is staying true to its product roadmap. Unlike pre-development and pre-issuance investors, token holders cannot avail of the protections in a SAFT. Neither can they benefit from RTUs as they are not workers, employees, or contributors. However, to some extent, they can rely on the existence of these legal frameworks. Because even if they do not directly benefit from them, they are badges and indicators of legitimacy showing that a crypto company has legal commitments and obligations to other people and is here to stay for the long run. Thus, it is an indirect guarantee to them that the project is not a scam.

Legitimacy for government regulators and enforcers

Being seen as legitimate to government regulators and enforcers is another very important consideration. Crypto companies suspected of being illegal or issuing illegitimate tokens may be subjected to investigation and the imposition of possible penalties.

A legal solution like a SAFT not only facilitates compliance with the conditions and requirements of securities law but also serves as a declaration of legitimacy. Thus, in a way, it minimizes the risk of increased and stringent scrutiny from government authorities.

Conclusion

Given the current state of things, it is extremely difficult for crypto companies to gain legitimacy through government approval. Until laws and regulations on crypto become clearer and spelled out, crypto companies will have to find alternative ways to be seen as legitimate.

Modern legal solutions like the SAFT and RTUs enable crypto companies to build legitimacy by setting protections in place against fraud and providing enforceable legal commitments to concerned stakeholders.

Learn more about how you can use Uptoken to gain the trust and confidence of the crypto community by reaching out to us.

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