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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As they say, everything’s bigger in Texas, including initial coin offerings. A Texas federal court recently unsealed a complaint filed by the Securities and Exchange Commission (SEC) against a Texas-based company (the “Company”) that presents itself as the “world’s first decentralized bank” and claims to have provided “the largest ICO to date.”1 Among other things, the Company is accused of engaging in the offering of securities without properly registering with the SEC and defrauding investors in the process.

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While industry watchers in Washington, DC eagerly await the next fintech charter pronouncement from the Office of the Comptroller of the Currency (OCC), the Federal Trade Commission (FTC) has quietly established itself as one of the main federal fintech regulators. The FTC was not the first federal agency active in the space—that was the Bureau of Consumer Financial Protection (Bureau) with Project Catalyst; and it has not been the splashiest either—the OCC probably has that honor. But with a combination of enforcement actions, industry outreach, and strategic appointments and initiatives, the FTC has developed a consistent fintech presence.

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Companies involved in global supply chain services are becoming increasingly interested in blockchain technology and how the use of this technology can enhance efficiency and security within the supply chain. Blockchain-based applications have enormous potential to transform transportation and logistics operations in the United States and worldwide.

Last month at Transparency 18 in Atlanta, approximately 40 companies performed demonstrations for supply chain stakeholders from around the world exhibiting how software using blockchain and other disruptive technologies could enhance supply chain efficiency. In addition to private stakeholders, government agencies, such as various customs authorities, have expressed interest in using blockchain technology as a foundational element for more robust trusted trader programs and improved risk management systems.


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The SEC Division of Investment Management recently published a letter to the Securities Industry and Financial Markets Association (SIFMA) addressing the interest among sponsors in offering registered funds that would hold cryptocurrencies and cryptocurrency-related products. The Division emphasized that flexibility to innovate is a key feature of the Investment Company Act of 1940 (the “1940 Act”) and reiterated that the Division seeks to “foster innovation that benefits investors and preserves the important protections that Congress established in the 1940 Act.”1 The Division noted, however, that cryptocurrencies and related products are in many ways unlike the types of investments typically held by registered funds, and, as a result, there are a number of investor protection issues that need to be addressed before sponsors begin offering investments in cryptocurrency-holding funds to retail investors.

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The U.S. Department of Justice (DOJ) recently announced a shift in its policies for enforcing federal marijuana laws in states where marijuana has been decriminalized or legalized. Notwithstanding this shift, however, the DOJ is unlikely to begin prosecuting marijuana growers and distributors who are operating in compliance with state law. So where will the feds go now? The DOJ will likely prosecute the most egregious violators of state law which means that the stakes are higher for those individuals and companies. The worst offenders of the state regimes now face not only state penalties, but the risk of enforcement by federal authorities, who have more investigative resources and can seek much more extensive and severe penalties.

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