In hopes of helping society grow and to allow everyone gain more insight into exactly how crypto tokens will be viewed in the eyes of the law, the U.S. Securities and Exchange Commission (SEC) has released a regulatory guidance document that outlines how and when cryptocurrency should be used and what certain tokens will be classified as, though mainly in reference to securities.
The first to state that regulators were working to develop new guidance for crypto tokens was SEC Director of Corporation Finance, William Hinman, in November of 2018. Others have also made it clear that this was a solid plan for the future of society including Valerie Szczepanik, FinHub head, and Commissioner Hester Peirce.
Hinman revealed that the guidance would be in “plain English” and allow anyone invested in crypto tokens to seamlessly be able to determine its qualification as a security offering. The document includes a plethora of useful information as well as examples of both tokens and networks that could be considered securities under the law, and a few examples of those that do not.
Securities are basically defined as anything that carries some sort of monetary value that one can claim ownership of such as banknotes, common stocks, and bonds. Securities can be traded, and this is why it is essential for items that are securities to be properly defined as such. Securities can be classified into three types including debt, equity, or derivatives, that all have their own financial and legal structures.
When it comes to the framework of this guidance document set by the SEC, there are a number of factors outlined throughout that those with interest in crypto tokens, and token issuers, will need to evaluate in order to determine if they qualify as securities.
One of the main factors is whether or not a profit can be expected, and how the purchase price relates to the market price. It is also stated that it is important to take note of how the operation is being run by knowing if specific tasks within the network are run by a central group or person, how developed they are, and how often they must rely on the efforts of others. There is also the importance of how these tokens can be used currently or in the near future.
If the network is fully developed, if the tokens are focused on a set case, if the appreciation value of the tokens are limited, or if it is billed as currency, then there may be cause for a reevaluation of whether the token should be registered as securities.
While this document brings about some much desired and needed clarity when it comes to token issuers, it is not legally binding and can only be viewed as a guideline. In order for such a document to carry any true weight in society, it would need to be issued by the Commission.
Commissioner Hester Peirce stated, “Now staff guidance is staff guidance. The Commission can go ahead and bring enforcement actions anyway but staff guidance does carry a bit of weight, but I would like to do something more formal at the Commission level, so people have a little bit more certainty.”.
While the guidance of the SEC is refreshing to many after years of waiting for something such as this to light the way, there are still a few things it does not address clearly. One such unanswered inquiry involves the concept of custody for broker-dealers holding cryptocurrencies. While it is easy to verify who owns the right to what cryptocurrency at any given time, it is not easy to prove who also may have or have had access to those holdings. Showing and proving full possession of funds is essential in the financial world, and with the rise of digital funds, new regulations must be put into place.
Those who are interested in learning more about these regulations or want to keep up-to-date on the latest legal proceedings, please visit at Jeffrey Newman Law!
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