Blockchain entrepreneurs have long criticized U.S. financial regulators for a lack of clarity. During the epic 2017 ICO run-up, the SEC and CFTC were largely silent, letting all sorts of shifty projects bamboozle the investing public. The SEC didn’t comment officially on ICOs until December 11 of that year—six days before bitcoin hit its peak. By then, PonziCoin and Diamond Reserve Club were already scams, while many legit project folk were left scratching their heads. Had their brilliant new ICO broken the law, or somehow skirted it?
At least the SEC seems to be paying more attention now. Last week, Commissioner Hester Peirce (aka “Crypto Mom” for being more friendly to blockchain than her four commissioner colleagues) admitted her agency had been asleep at the wheel and needed to do a better job of partnering with blockchain projects on their regulatory dilemmas. She promised the SEC would soon release staff guidance on how regulators might apply securities law to digital assets. And she wasn’t lying. Today the SEC issued what it calls a new “analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.”
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The guidance runs to 11 pages and mostly analyzes the Howey Test, a U.S. Supreme Court device for deciding whether financial transactions constitute investment contracts. The most crypto-relevant advice comes on page 9, where the guidance outlines circumstances under which tokens are less likely to be considered securities. For example, “fully developed and operational” blockchains are less in danger of regulation, as are digital assets “marketed in a manner that emphasizes [their] functionality.. and not the potential for the increase in market value of the digital asset.”
Still the document hardly provides certainty. As Peirce said last week, the “facts and circumstances” around every token asset are different, requiring lots of interpretation. The guide and accompanying press release are full of disclaimers, for instance that “the Commission has neither approved nor disapproved [this] content.” Which isn’t helpful. If you’re launching a token project, you’re still going to need a securities lawyer to dissect the wheretofores, and it’s probably a good idea to talk to the SEC directly. Peirce says her door is always open and, if you can’t get hold of her, the SEC now organizes “local peer-to-peer meetings” to help entrepreneurs in-person.