Today, the SEC released staff guidance on a Framework for “Investment Contract” Analysis of Digital Assets. While the Blockchain Association has long believed that additional guidance is needed and we appreciate that regulators are thinking about this issue, the framework released today raises more questions than it answers. We are concerned that this guidance alone does not provide the regulatory certainty that the industry needs, which will further harm innovation and stifle investment in open blockchain networks in the United States.
What does the guidance do?
Broadly, today’s guidance reinforces and expands on a speech given by SEC Director William Hinman in 2018. The first part of the guidance sets forth criteria that would make a token more likely to be a security, and the last section outlines some factors that would cause a token to be less likely to be deemed a security. Some of these factors indicate that the SEC is devoting significant time and attention to understanding blockchain-related issues, and we are glad to see more insight into the SEC’s thinking.
What doesn’t it do?
Critically, the industry is still awaiting insight as to which of these factors matter most to the SEC. This guidance expanded the dozen or so factors discussed in Director Hinman’s speech into more than thirty separate considerations. As a practical matter, just about every open blockchain project — including those devoting tremendous energy and resources to compliant, honest conduct — is certain to be subject to many of the factors this guidance sets forth.
A pessimist would read this guidance and believe the SEC is asserting that almost every digital asset is a security. Of course, being subject to the securities laws (even when there is no corresponding investor protection benefit) would render many token projects unusable. In any case, without further clarity on the actual standard being applied, it remains difficult for projects to confidently innovate in the United States.
We hope that today’s guidance is a first step, and that we can expect the SEC to follow up with clear examples of how the SEC is weighing these factors — ideally through additional guidance, and not solely through enforcement actions.
At the end of the day, the SEC’s mission is to interpret and apply the securities laws. We’re encouraged that some visionary leaders in Congress are continuing to work on improving those laws with the Token Taxonomy Act, which provides a much clearer path forward for the proper regulation of open blockchain projects.