- By Pierre-Alexandre
April 4th, 2019
The United States Securities and Exchange Commission (SEC) has finally published its regulatory guidance for token issuers in the country, roughly six months after their first announcement.
SEC's New Crypto Guidance, Short Version:— Zach Smolinski (@ZachSmolinski) April 3, 2019
"This is Howey. Do it."
SEC document to help project developers
The regulatory guidance will serve as a guide for token issuers to help them determine if their cryptocurrencies fall under the US securities classification.
"You could call it Frank or Haim, it is an investment contract the Howey test applies to. You can call it a STO, you can call it an IEO, it doesn't really matter. That is essentially the message." - @stephendpalley on the @SEC_News new #crypto framework. https://t.co/6ieAFWZeo1 pic.twitter.com/6mqouXuxfW— BLOCKTV (@BLOCKTVnews) April 4, 2019
Excellent Twitter thread (21 tweets) from Jake Chervinsky, Government enforcement defense & securities litigation at Kobre Kim LLP:
0/ The SEC's DLT Framework, through the eyes of a securities litigator.— Jake Chervinsky (@jchervinsky) April 4, 2019
Okay, so it doesn't answer any big questions about crypto regulation, but if you thought it would, you kind of deserve to be disappointed. I, for one, choose to be (mostly) happy with this thing.
Another very good thread from Katherine Wu detailing what to expect from the SEC guidance:
🚨 THIS IS HUGE: the SEC just released an official statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets” analyzing whether a digital asset is a security or not— Katherine Wu (@katherineykwu) April 3, 2019
READING NOW WILL POST ANALYSIS HERE STAY TUNED
According to the framework, there are some factors that project developers have to consider before they evaluate whether their tokens are security or not.
The document specified that token issuers have to consider factors such as the profit expectation of the project, whether there is a central entity responsible for some activities within the network, or whether there is a group tasked with creating or supporting a market for the cryptocurrency.
To help developers determine if their tokens are securities, the document advised them to look into some specific criteria. The criteria include the reliance of a project on the effort of other people, a reasonable expectation in profit, the network’s level of development, the use cases of the token, whether there is a relationship between the cryptocurrency’s purchase price and its market price, and a few other factors.
There are some projects that have already been developed, and their tokens are regarded as securities by the regulatory bodies in the US.
The SEC provided guidance for project developers to help them properly re-evaluate their projects and determine if their tokens are securities or not.
Remember all those arguments about the term "sufficiently decentralized"?— Jake Chervinsky (@jchervinsky) April 4, 2019
It doesn't show up even once in the SEC's DLT Framework. In fact, the word "decentralized" only appears one time in the entire document.
A good reminder not to get too excited about non-binding guidance.
The commission listed the criteria including whether the blockchain and the native cryptocurrency are fully developed and operational, if the token has a specific use in the real world or is just a tool for speculation, whether the prospect of value appreciation of the token is limited, and if considered as a currency, the token could serve as a store of value.
This guidance was mostly derived from the Howey Test, and it is essential to understand that it is not a clear regulation. Instead, it is a guide to help crypto projects determine if their tokens act as securities or not.
I am a bit surprised by the crypto Twitter community reaction on the SEC guidance. This is what they have said all along. 90% of utility tokens are securities and were sold ilegally. Face it. You took the risk and now figure out how to fix it.— Carlos Domingo (@carlosdomingo) April 4, 2019
The cryptocurrency community believes that even though the regulation is still not precise, this guide would go a long way in helping projects know how to develop their tokens.
Patrick Berarducci, in charge of Law, software, product, policy at ConsenSys agreed with this point, noting that it would help bring clarity to companies aiming to launch digital currencies:
0/ Yes, I may write more, but I mostly agree with @MattCorva. The SEC's rules still aren't as clear as places like Singapore, UK, and France, but I'm hopeful this will still give law firms, projects, investors, and customers sufficient clarity to start doing business again. https://t.co/y6wlC19BiM— Patrick Berarducci (@PatBerarducci) April 3, 2019
Meltem Demirors from Coinshares thinks crypto funds and airdrops are at risk:
🔥😑💀 this SEC guidance on Howey Test re: ICOs basically kills crypto funds *and* airdrops in one swoop— Meltem Demirors (@Melt_Dem) April 3, 2019
"the asset is offered and purchased in quantities significantly greater than any user would reasonably need, or so small to make use of the asset in the network impractical"
SEC issues a no-letter action to TurnKey Jet
A few hours before publishing its token issuing guidance, SEC issued a no-action letter to a crypto project, TurnKey Jet (TKJ). This is the first of such letter issued by the commission which stated that it wouldn’t be taking any action on TKJ since the token doesn’t fit into the description of a security at this point.
The SEC's stance that Tunkey Jet Token ($TJT) is basically the same stance that a closed-loop gift card is not a security.— lawson : baker (@lwsnbaker) April 3, 2019
Nothing new here to see. https://t.co/8lQyIxJA0r
This letter is critical as it could positively affect the way legislatures see security tokens. There are crypto bills in the US at the moment and this latest development could affect the way regulators see cryptos.