The U.S. Securities and Exchange Commission (SEC) has recently published the long awaited regulatory guidance for token issuers. The guidance focuses on tokens and outlines how and when these cryptocurrencies might fall under the securities classification.
The statement from SEC states, blockchain and distributed ledger technology have the potential to catalyze a wide range of innovation. These technologies are being continuously used to create financial instruments, sometimes in the form of tokens or coins that sometimes provide investment opportunities exactly like those offered through the traditional forms of securities. Depending on the nature of digital asset being tokenized, including what rights it purports to convey and how it is offered and sold, the token or coin might fall under the definition of a security under the U.S. federal securities laws.
The information published in the framework will apply to entities conducting the following activities in the areas of digital assets:
- offering, selling, or distributing
- marketing or promoting
- buying, selling, or trading
- facilitating exchanges
- holding or storing
- other professional services
- offering financial services such as management or advice
Framing Out if Token is a Security
The framework itself outlines a number of factors that token issuers must keep in mind before evaluating whether or not their offerings qualify as securities. These factors include an expectation of profit, whether a single or at least central group of entities are responsible for specific tasks within the network, and whether a group is creating or supporting a market for a digital asset.
The criteria for this reevaluation include whether:
- The distributed ledger network and digital asset are fully developed and operational.
- The token is focused on a specific use case rather then speculation
- Prospects for appreciation in the token’s value are limited
- If billed as a currency, the token actually operates as a store of value.
Interestingly the points mentioned in the recent framework by SEC might clear out some air but this is not a legally binding document. This should just be seen as a formal guidance provided by SEC on this matter.
To read more about the recently published guidance by SEC, please read: