The SEC and Digital Assets


Ben Lambert

Director of Legal Operations and Business Development at Thor

Perhaps no other securities related subject received as much attention — and scrutiny — as ICOs and digital assets in 2018. Many of us got caught up in the wonder and marvel of the technological applications of distributed ledger technology. But, from the legal side, it has been far less easy to get excited when it comes to clarity on where regulation of this exciting tech starts and stops. Between the guidance from the CFTC, SEC, IRS, and FinCEN, projects face an uphill battle when trying to stay compliant. Add in conflicting guidance and regulations from the individual states, and regulatory water becomes murkier still. That said, in November of 2018, SEC Chairman Jay Clayton provided perhaps his most unambiguous comments to date:

“My view is that our rules have stood the test of time,” he said. “I’m not going to change (investor protection) rules just to fit a technology.”
— SEC Chairman, Jay Clayton

His comments effectively squashed any hope that the SEC may adopt new regulations specific to digital assets. At the same time, individual states, such as Wyoming, have moved forward with groundbreaking legislation that relax the state’s regulatory framework for cryptocurrency and amend the state’s corporations code so as to better facilitate the development of blockchain and cryptocurrency businesses. This puts states and cryptocurrency based project at odds with federal requirements (marijuana anyone?). It will be very interesting to see how consumer demand continues to shape both state and federal rule making. Clearly, it doesn’t appear the SEC will blink first.

With all of the regulatory uncertainty, it has always been our view to focus on what we can control and to align those interests with what we know about securities regulations in general. As a result, we have stayed away from flashy (and often meaningless) partnerships that so frequently make the crypto headlines and have focused on partnerships that will allow us to maintain regulatory credibility (Dwolla, Unit21, etc.).

There is no doubt that exchanges, flash crypto-marketing, and roadshows all have their place in this puzzle, but we believe this is secondary to establishing the fundamentals of our platform. We recognize this is a long-game and are grateful that our supporters do as well.

Looking ahead to 2019

U.S. federal regulatory bodies have still left many important questions unanswered as we approach the close of the decade. Jenny Leung touched on some of the most important unanswered questions in her article titled “7 Legal Questions That Will Define Blockchain in 2019” for CoinDesk.

The three that I find most pressing are:

  • Will the SEC define ‘sufficient decentralization’?
  • Will international regulators work together?
  • Will we be able to regulate decentralized exchanges?

The eventual answers to all three of these questions will have an impact on our exact roadmap as we move forward, so we will need to stay attuned. While some of these questions may not be answered in the near term, we may get some guidance regarding what constitutes sufficient decentralization in the eyes of the SEC, as Leung explains:

Although the SEC does not make law, it may release official guidance on these areas that will effectively set up goalposts for blockchain networks to achieve “sufficient decentralization.”
Even if some level of decentralization could bring token sales outside of the SEC’s jurisdiction, was SEC Commissioner William Hinman correct in saying that the ethereum network is sufficiently decentralized? At what stage would offers and sales of a token transform from a security to a non-security?

As Leung points out, more defined goal posts are the key moving forward because the SEC does not pass law. Will there be specific measurables used to define “sufficient decentralization”? We can hope.

I do envision a more consistent approach from state and federal legislators and regulation agencies through 2019. The current gap between the two is clearly unsustainable long term. There are two areas in particular I would like to see some clarity.

First, will the SEC help us to define a Utility Token similar to what the state of Wyoming has done? Even more specifically, will this definition be carved out of securities regulations, preventing crossover and making it clear when a digital credit is classified as one or the other?

Second, will the four major relevant federal regulatory bodies get on the same page about what a cryptocurrency is exactly? Currently, the IRS calls it a property, the CFTC calls it a commodity, the SEC calls it a security, and FinCEN calls it a digital currency. Ultimately, these agencies will need to reach some agreement for companies to have a clear understanding of how they can use this technology to create value and products for the general public.

I am confident it will happen, but when?

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