US Securities and Exchange Commissioner Hester Peirce is presenting a new proposal on how to regulate cryptocurrencies.
Under her plan, US regulators would dramatically shift how they are attempting to regulate blockchain-based digital assets. They would no longer classify them as financial securities – at least not initially.
Currently, only a handful of cryptocurrencies are exempt from US securities laws, including Bitcoin (BTC) and Ether (ETH). While there have been a few exceptions to the rule, the SEC maintains that the risk is quite high of an initial coin offering (ICO) being classified as a security.
Under Peirce’s safe harbor proposal, however, companies that issue digital tokens will get some breathing room so they can establish their networks and communities before dealing with regulatory requirements.
Speaking on Thursday at the International Blockchain Congress in Chicago, Peirce explained how crypto-related firms would be granted a three-year grace period from the launch of their first token sale to reach a certain level of decentralization. If achieved, such tokens would no longer meet the SEC criteria for being classified as securities under the federal securities laws.
Several leaders in the crypto space are applauding the Commissioner’s approach to regulating the new industry with a light touch that doesn’t drive entrepreneurs out of the country in search of governments with a more flexible framework for tech innovation.
Says Catherine Coley, CEO of Binance.US:
“If adopted, the proposed safe harbor could be the most groundbreaking development for the US cryptocurrency market to date…
By putting development first and giving projects runway to build robust networks, the proposed safe harbor puts an important stake in the ground towards supporting American access and acceptance of digital asset markets. In the long run, it will help bring more Americans into digital asset trading and foster greater network participation.”
The proposal underscores how a blockchain project arrives at decentralization – it needs time, developers, users, use cases and steady adoption.
According to the proposal:
“The analysis of whether a token is offered or sold as a security is not static and does not strictly inhere to the digital asset.”
So while some tokens might have the characteristics of a security when first introduced, they’re fluid and their purpose can evolve as their network expands.
Steve Kokinos, CEO of blockchain protocol Algorand, calls the formal proposal an important step:
“The blockchain industry and regulators need to continue a healthy dialogue for the US to truly become the global and responsible leader in blockchain innovation.”
Adds Katie Biber, general counsel of institutional crypto custodian Anchorage:
“We urge the Commission to move promptly to adopt it and to consider other innovative ways to increase investor choice in the digital asset space.”
If Peirce’s proposal is accepted, then it could establish strict rules for crypto and blockchain projects when raising capital via token sales, including issuing requirements for personal disclosures, source code disclosures, appropriate public announcements and a public list revealing the identities of the ICO team members.
The idea is to protect consumers while also creating an environment that allows innovation to flourish.
The proposal clarifies the idea of “network maturity” or the point at which a project’s digital tokens are no longer being controlled by a single entity.
“The definition of Network Maturity [for a cryptocurrency] is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances.”
Peirce acknowledges that the success of the safe harbor proposal depends on token issuers acting in good faith and that it does not undermine any necessary enforcement action against fraudulent ICOs or other illegal activities.
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