In light of Kik’s recent announcement of a crowdfunding campaign to bring about a new Howey Test for cryptocurrencies as well as a statement from SEC Director of Corporation Finance William Hinman regarding the possibility of ICOs being eligible for relief from enforcement, regulatory confusion abounds. What is clear is that regulations are suffocating development of crypto platforms and ambiguity only makes the situation worse. The question remains: what is the path forward for crypto regulations and how does the blockchain community arrive at an answer?
Here’s What We Know from the SEC
The SEC released a Framework for “Investment Contract” Analysis of Digital Assets that was to supposedly provide clarity as to how token projects would be evaluated. The problem is that according to this framework, just about any token should be categorized as a security. Circle reacted to this in a Medium blog post as follows:
“Since every project is likely triggering one of the factors [listed in the SEC framework], no project — and no exchange that decides to list the project’s tokens — can rely on the guidance to reduce the risk of enforcement. The foreseeable consequence of this is chilling innovation in the U.S. and nudging crypto projects toward jurisdictions with greater regulatory clarity — neither of which is good for U.S. business.”
Other leaders of token projects are feeling justifiably boxed-in by the SEC’s framework as well. It doesn’t seem right for every token to automatically be considered a security. Afterall, currencies such as USD are not securities. Hotel reward points are not securities. Virtual monies in games are not securities. The list goes on.
If we are to read into Hinman’s recent comments at the SEC’s FinTech Forum in Washington, D.C., we could interpret that perhaps the agency realized its error and is attempting to provide hope. Pointing to TurnKey Jets as an example of a project that secured a no-action letter, Hinman said, “even if some aspect of the project was not fully developed, the SEC may have still been willing to provide no-action relief.” Though his comment suggests that the SEC could be forgiving when it comes to evaluating crypto projects whose tokens initially appeared to be an investment contract before evolving into a token with a true use case, most token projects will be hesitant to take the SEC’s word for it.
So, What are Token Projects to Do?
The continued lack of clarity as to how token projects will be categorized by the SEC lead Kik to take drastic measures. The messaging app that raised $98 million in its 2017 ICO received a notice warning that the agency may seek enforcement action and now faces a lawsuit. Kik responded by initiating a campaign to crowdfund $5 million in crypto to fight the SEC in court, ideally resulting in the creation of a new Howey Test for cryptocurrencies. Though the optics of a project that already raised nearly $100 million now asking for more money to fight its own legal battles are a bit dubious, many token projects agree that something needs to be done.
Circle’s team believes, “Congress must pass laws to seize the unique opportunities created by the innovations in crypto and blockchain technologies and businesses.” The company and industry partners support “the Token Taxonomy Act, which among other things would exclude digital tokens from the definition of a security.”
To the positive, Montana passed a bill to exempt utility tokens from securities laws this May; hopefully other states may look to Big Sky Country as an example. Most important for the token economy is that the innovative spirit that brought bitcoin, ethereum, and so many other revolutionary concepts to life will not be held back by the bureaucracy’s lack of understanding and appreciation for the values of decentralization.
Contributed article by Gov van Ek, Co-founder of BitCar