The SEC has finally moved the crypto regulation needle, but only slightly. The US Securities and Exchange Commission created a stir this week when it published its first official guidance on crypto-tokens in nearly two years. While it may slightly ease the growing tension between regulators and blockchain technology advocates, however, the new "framework" is far from the kind of crypto-specific rules that many enthusiasts have long hoped for.
Instead, it largely reiterates what the SEC has been saying all along: If you're going to do a token sale, you should first consider securities laws—decades-old rules designed to protect investors. And though it slightly advances the discussion of what makes a cryptocurrency network decentralized enough to exempt its token from securities laws, we are still left wondering how exactly the agency will make such a determination in the real world.
That digital assets are not exempt from securities laws has been clear since early last year, when SEC chair Jay Clayton told Congress that nearly every initial coin offering (ICO) he'd seen looked like a security. His agency has since prosecuted several ICO projects for selling unregistered securities. Some blockchain policy advocates, meanwhile, argue that the lack of guidelines for determining whether a given crypto-token is a security, a commodity like Bitcoin—or something else entirely—is holding back entrepreneurship and innovation in the US. Startups may flee to friendlier jurisdictions, they warn.
The new framework does not assuage those concerns, and clearly was not meant to. Instead, it provides an in-depth description of how the SEC uses a measure called the Howey Test to determine whether a given asset qualifies as a type of security called an investment contract. According to the test, such a contract "exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
But how do we know whether buyers of a given digital token have "reasonable expectations" to make money from the efforts of others? The framework sheds a sliver of new light on how it is thinking about this question, by introducing a new term: the "active participant." This could be a "promoter, sponsor, or other third party (or affiliated group of third parties)." If an active participant "provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts," the token is a security, according to the framework.
That's incredibly broad, however. The document lists some hypothetical examples of what it means, but we are still left wondering how to assess real-life situations. For instance, was the small team that covertly fixed a critical bug in Zcash "providing essential managerial efforts the success of the enterprise"?
The clearest win for crypto enthusiasts is that the framework leaves open the possibility that a token that has been sold as a security can be reevaluated later and have its status changed. For instance, a project might sell tokens as securities to raise money to build a network. Once the network is built, and if it is really decentralized—apparently meaning there is no essential active participant—its token may not be a security anymore. But again, how exactly will the agency make such a determination?
Despite all this, the document doesn't appear to matter all that much in terms of policy. A footnote on its title says that it is "not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content."
The distinction between the terms "commission" and "staff" is important. Technically, this framework is a statement from SEC's division of corporation finance, not the commission itself. Last month, SEC commissioner Hester Peirce told the audience at a conference in Washington, DC, that while this sort of staff-level guidance is valuable, something from higher up, from the "commission level," would have more impact since "we're the ones that make the decisions." So when will we get that? Peirce didn't make any promises. "Regulators are slow," she said.
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Loose Change
Fill your pockets with these newsy tidbits.
- Who knows why Bitcoin's price suddenly jumped 20% earlier this week, but an anonymous order that was worth $100 million and spread across three different exchanges may have had something to do with it. (Reuters)
- Coinbase says it currently holds an insurance policy that covers its hot (internet-connected) wallets for up to $255 million. (Coinbase)
- Officials in Missoula County, Montana, are expected to pass a resolution that would require new cryptocurrency mining operations to offset their power use by building or funding renewable energy projects. (Wired)
- Ed Felten, who served as deputy CTO for the US during the Obama administration, is a co-founder of Offchain Labs, a startup focused on "scaling smart contracts." It just raised $3.7 million in venture capital. (CoinDesk)
