Today, Securities and Exchange Commissioner Hester Pierce released a proposal to create a “token safe harbor” that would exclude certain tokens from the definition of a security under U.S. law for a certain period of time. The Blockchain Association welcomes the proposal and applauds Commissioner Pierce for her leadership in working to address this critical issue facing our industry.
Some tokens that fuel blockchain networks may be deemed securities when initially sold and distributed, but the tokens’ characteristics may change over time so that they no longer meet the definition of a security. We are particularly encouraged that the framework released today recognizes that at a certain level of network maturity, a network’s token would no longer meet the definition of a security. The proposal explains that “a token transaction may no longer represent an investment contract if purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts” to run the network.
However, under current interpretations of the securities laws, blockchain innovators face a “chicken or the egg” conundrum: as Peirce’s proposal explains, “in order for a [blockchain] network to mature into a functional, decentralized network… tokens must be distributed to potential users, programmers, and participants in the network. Additionally, secondary trading of the tokens typically provides essential liquidity for the development of the network. The application of the federal securities laws to these transactions prevents the transformation of the token sold as a security to a non-security token functioning on a mature decentralized network.” This has caused many promising blockchain projects to move overseas, provide services only to non-US participants, or shut down altogether.
Providing blockchain innovators the ability to develop their networks under a clearer regulatory and legal framework is vital if the broader open blockchain economy is to grow to its full potential here in the United States. While this is likely just the beginning of a process, which we welcome, that will allow for stakeholder comment and feedback, it is a necessary step if the United States is going to play a meaningful role in this new technology. Commissioner Peirce’s proposal is a promising first step toward achieving that goal, and the Blockchain Association thanks her for her efforts to address this issue.