The U.S. Securities and Exchange Commission (SEC) has published fresh regulatory guidance for token issuers, nearly half a year in the making.
The guidance focuses on tokens and outlines how and when these cryptocurrencies may fall under a securities classification, according to the document.
SEC Director of Corporation Finance William Hinman first revealed that the regulator was developing new guidance for crypto tokens last November, and other members of the agency, including FinHub head Valerie Szczepanik and Commissioner Hester Peirce, have repeatedly said that SEC staff was working on the document.
In November, Hinman said the “plain English” guidance would help token issuers easily determine whether or not their cryptocurrency would qualify as a security offering.
An individual familiar with the matter said “this should be useful guidance for them to sort out if they’re dealing with a security and what federal securities laws they should comply with.”
“One thing we’re trying to make clear in this analysis is not one of these factors is dispositive, you have to look at the whole mix,” they said.
The guidance includes examples of both networks and tokens that fall under securities laws, as well as a project which does not.
Legal clarity?
While this guidance has been a long time coming, and provides some legal clarity for token issuers, it is not a legally binding document, and should be seen more as a guideline.
Peirce has said in the past that staff-issued guidance does not carry the weight that guidance issued by the Commissioners would.
Speaking during a fireside chat with Laura Shin at New York University in March, Peirce said that SEC “staff is working on some guidance,” explaining:
“Now staff guidance is staff guidance. The Commission can go ahead and bring enforcement actions anyway but staff guidance does carry a bit of weight, but I would like to do something more formal at the Commission level so people have a little bit more certainty.”
Using staff guidance does not necessarily mean the SEC won’t come after any token offerings it deems in violation of securities laws, even if the issuers believe they are compliant with the guidance produced by the regulator, she said.
“The problem with securities law generally is it is facts and circumstances, it’s always been, it’s not just the crypto space,” she explained. “We tend to say, ‘all right, think about the Howey test,’ which is the Supreme Court test, and think about how it applies in your circumstances and if we don’t agree with you we’ll bring an enforcement action so it’s a little bit of a, you’ve got to apply the principles to your facts.”
Some issues that startups should keep in mind revolve around what information is available about a network and who can provide that information and whether a token is being sold on a functional network, she said.
If there is only a single source of information that investors can look to before purchasing a token, the token may possibly be a security, while if there is no single or central source of information, that may be more decentralization.
Peirce also hinted in March that today’s guidance would help token issuers determine how to evolve their products away from a securities classification. Hinman previously implied that ethereum had evolved away from being classified as a security, a view that SEC Chairman Jay Clayton may have agreed with, though the latter did not explicitly say so.
Remaining questions
While the guidance discusseS securities classifications, othequestionson remain unanswered. In particular, the SEC has yet to provide clarity around the idea of custody for broker-dealers holding cryptocurrencies.
The key issue around custody comes from the fact that while broker-dealers can easily verify that cryptocurrencies in any given wallet belong to them, it is harder to prove that no one else has access to the holdings.
Szczepanik said during a panel at the D.C. Blockchain Summit in March that these firms “need to show that they have possession and control and that could be hard to demonstrate with a digital asset.”
“A digital asset … is controlled by whoever possess the private key, and it’s hard to prove a negative,” she explained.
Hester Peirce image via Nikhilesh De for CoinDesk