A U.S. Securities and Exchange commissioner has suggested a safe harbor for digital token sales – an ambitious proposal to fix what has been called a “regulatory Catch 22” in the cryptocurrency landscape.
In a speech at the International Blockchain Congress this month, Hester Peirce proposed a three-year grace period from the time of the first token sale, during which time the tokens would be exempted from the registration provisions of the federal securities laws.
The goal is to allow time for token projects to mature before subjecting them to the agency’s scrutiny, and questions about whether a token sale is a securities transaction.
“By essentially buying time for this question to be answered, the safe harbor makes it much more likely that the question as to whether something is a security can be answered in the negative,” Peirce said.
The commissioner said there is currently a regulatory Catch 22: would-be networks cannot fully mature unless tokens can be freely distributed among users, yet these networks can’t get their tokens into people’s hands because the tokens may be subject to securities laws.
“The securities laws cannot be ignored, but neither can we as securities regulators ignore the conundrum our laws create,” she said.
The proposed safe harbor would include several conditions that must be met. Among them, development teams must intend for the network on which the tokens operate to reach “network maturity” (defined as either decentralization or token functionality) within three years.
The team would also have to disclose key information on a public website and file a notice with the SEC within 15 days of the first sale of tokens indicating that it was relying on the safe harbor. The safe harbor would not be available to teams who have a member that is subject to disqualification as a “bad actor” under securities laws. The SEC’s antifraud authority would also be reserved with respect to token sales under the safe harbor.
Peirce emphasized the safe harbor remains a work in progress and said she is seeking additional input on the proposal, which, if adopted, could provide increased certainty in the crypto landscape and could encourage additional token projects.
This is a very surprising proposal. I’m very interested to see if it has legs.
