Introduction

Are digital tokens issued by blockchain companies securities under U.S. law? Much of the industry, including several prominent law firms, has taken the position that they are not. The Securities and Exchange Commission (SEC) has consistently stated that many or even most are securities. It recently issued a “Framework” that laid out a host of criteria that will guide the agency’s analysis. With the framework and its first blockchain no-action letter, the SEC has now articulated three scenarios where a digital token may not be a security: 1) if the token is merely a store of value like Bitcoin; 2) pursuant to its no action letter, if the token exists in essentially a closed system designed for consumptive use only and has a fixed value pegged to the dollar; or 3) where the “efforts of others” prong from the Howey test is not met. The framework focuses mostly on the third case.

We will review the framework, and suggest a way to strengthen the SEC’s standard to clarify how a digital token could transition to a non-security even if initially issued as a security. We believe that if a clear and workable regime is not adopted soon, the U.S. risks being left behind in the race to unlock blockchain’s transformative potential.


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Last week the SEC offered its clearest guidance yet on when blockchain tokens and other digital assets would be classified as “securities” under U.S. securities law and subject to SEC regulation.

Specifically, the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) issued its first-ever “Framework for ‘Investment Contract’ Analysis of Digital Assets.


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CU Ledger, a consortium of U.S. credit unions, announced on Monday, March 11, that it will work with IBM to develop blockchain solutions to improve services such as identity authentication and know-your-customer (KYC) compliance. CU Ledger also indicated it is looking to blockchain to improve payments and lending.

Marie Wieck, General Manager, IBM Blockchain explained

The Subcommittee on Capital Markets, Securities, and Investment held a hearing, “Examining Cryptocurrencies and ICO Markets,” this past Wednesday, March 14, 2018.

The stated goal of the hearing was to achieve greater regulatory clarity in the cryptocurrency and ICO markets, especially as these markets continue to grow and attract attention from investors and enterprises in pursuit of capital. Members of the subcommittee indicated that achieving this regulatory clarity would be critical to ensuring that investors are protected without unduly stifling innovation.


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The Wall Street Journal reported on Wednesday, February 28, 2017, that the Securities and Exchange Commission (SEC) has issued “scores of subpoenas and information requests to technology companies and advisers” in a sweeping probe of the Initial Coin offering (ICO) and Token Sale industry.

By way of background, ICOs or “Token Sales” typically involve the offer and sale of digital assets utilizing distributed ledger or blockchain technology. According to the report, the SEC is seeking information on the structure of these sales, including pre-sales under the “simple agreements for future tokens” (“SAFT”) framework.


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