The U.S. Securities and Exchange Commission (SEC) plans to clarify when securities laws might apply to crypto token sales, an official said Friday.
In a speech at the University of Missouri School of Law, Hester Peirce, one of the SEC’s commissioners, said that the agency’s staff are working on “supplemental guidance” to help projects determine “whether their crypto-fundraising efforts fall under the securities laws.”
While the Howey test – the U.S. standard for determining whether something is a security – generally provides clarity, she said, there is a “need to tread carefully” as token offerings do not always resemble traditional securities offering.
For instance, capital raised from decentralized token offerings could mean it is not truly owned or controlled by a company or person, unlike with traditional securities which are controlled by issuers or promoters, Peirce explained, citing a report from Coin Center.
The application of Howey test can also be “overly broad,” the commissioner added. She did not provide an idea as to when the guidance might be issued.
In November 2018, William Hinman, SEC director of corporation finance, also said that the regulator intends to release “plain English” guidance for developers on when and how crypto tokens may be classified as securities.
On the subject of cryptocurrency regulations, Peirce continued to say, “ambiguity is not all bad,” and that the delays in bringing regulatory clarity may, in fact, allow “more freedom” for blockchain technology to grow and projects to mature.
The commissioner further said that the SEC is also mulling whether new rules need to be put in place to regulate the crypto space, adding:
“If we act appropriately, we can enable innovation on this new frontier to proceed without compromising the objectives of our securities laws – protecting investors, facilitating capital formation, and ensuring fair, orderly, and efficient markets.”
Peirce argued that the SEC sometimes can be “impulsive” in dealing with crypto project and offerings. “We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences,” she said.
In July 2017, the SEC notably declared that securities laws could apply to some token sales, after an examination of ethereum-based project The DAO, which had collapsed in 2016 losing investors $60 million.
Startup Arca Seeks SEC Approval for US Treasury Bond-Backed Stablecoin
Arca is seeking regulatory approval to sell a new type of stablecoin to retail investors.
The Los Angeles-based digital asset manager filed a prospectus with the Securities and Exchange Commission (SEC) Friday for a bond fund whose shares would be tokenized on the ethereum blockchain. Arca hopes the SEC will approve the product later this year, a spokesperson said.
The Arca U.S. Treasury Fund would be available to the general public, but not traded on any stock exchange or alternative trading system, according to the filing.
However, shares in the fund (referred to as “Arca UST Coins”) would be represented as ERC-20 tokens, which run on top of ethereum. And Arca is framing the product as a form of stablecoin, or cryptocurrency designed to maintain parity with a traditional asset like the U.S. dollar, although the company cautioned that it may be slightly less stable than other such products on the market.
The minimum investment in the fund would be $1,000, with a target net asset value (NAV) of $1 per share. At least 80 percent of the fund would be invested in U.S. Treasury securities, with the rest in debt issued by various public or private entities inside and outside the U.S.
“It is therefore anticipated that the underlying portfolio, and the NAV of Arca UST Coins, will have relatively little volatility,” the document says. “Accordingly, although holders of Arca UST Coins could experience greater NAV volatility compared to typical stablecoins, such volatility will be relatively limited.”
Investors would receive quarterly dividends from the interest payments, according to the prospectus, although the fund’s “investment objective is to seek maximum total return consistent with preservation of capital.” In other words, stable value rather than big profits.
To buy shares from the fund or from another investor, traders “must first establish a wallet address through the Arca application and ensure that it is whitelisted with the Transfer Agent,” according to the prospectus. “Once an investor’s wallet address is whitelisted, the investor can use the Arca application to transfer money from a linked bank account to the Fund in return for shares of the Fund.”
It is not clear how many of these purportedly dollar-pegged tokens Arca aims to sell; the prospectus says the offering would need to raise $25 million for the fund to have viable operations.
Arca is not to be confused with NYSE Arca, one of several firms seeking to launch a bitcoin exchange-traded fund (ETF) in the U.S.
The SEC Just Released Its Long-Awaited Crypto Token Guidance
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.
The guidance includes examples of both networks and tokens that fall under securities laws, as well as a project which does not.
The framework itself outlines a number of factors that token issuers must consider 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.
Referencing the oft-cited Howey test, the guidance highlights “reliance on the efforts of others,” reasonable expectation of profits, how developed the network is, what the tokens’ use cases might be, whether there is a correlation between a token’s purchase price and its market price and a host of other factors.
The guidance also details how issuers should look at tokens previously sold, both in evaluating whether they should have been registered as securities, as well as whether “a digital asset previously sold as a security should be reevaluated.”
The criteria for this reevaluation include whether:
- The “distributed ledger network and digital asset are fully developed and operational” (meaning individuals can immediately use the token for some function);
- The token is focused on a specific use case rather then speculation;
- “Prospects for appreciation” in the token’s value are limited; and
- If billed as a currency, the token actually operates as a store of value.
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 at New York University in March, Peirce explained:
“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.”
While the guidance discusses securities classifications, other questions 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 possesses the private key, and it’s hard to prove a negative,” she explained.
Also Wednesday, the SEC issued its first-ever no-action letter authorizing a startup’s token sale to go forward (full story here).
Read the full guidance here:
Read the full guidance here:
DLT Framework by CoinDesk on Scrib