Top crypto investors reportedly met with SEC officials to argue that the technology should be exempt from the financial watchdog’s oversight.
According to a report in the Wall Street Journal, Andreessen Horowitz and Union Square Ventures held a meeting with senior SEC officials on March 28. They met with the SEC to continue the ongoing debate over how cryptocurrencies should be viewed by regulators.
According to the investors, cryptocurrencies should be exempt from SEC regulations as the purchase of tokens does not constitute an investment and therefore tokens are not securities. Their arguments focused on the fact that cryptocurrencies are used primarily to access blockchain-related services and to participate in blockchain networks. This makes them cryptocurrencies utilities rather than securities. Although the investors agree with SEC intervention in cases of fraud, they believe that bringing the technology under the commission’s regulatory umbrella would stifle the innovation of the nascent technology.
The SEC’s stance on tokens
The chairman of the SEC, Jay Clayton, has repeatedly offered his opinion that all tokens are securities and according to sources cited in the article the commission appears to reflect that stance as they appear unwilling to grant ICOs exemption from SEC regulations.
“If I have a laundry token for washing my clothes, that’s not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed, and those are offered to me as something I can use for the future, and I’m buying them because I can sell them to next year’s incoming class, that’s a security.” — Jay Clayton on securities.
The sources also say that the SEC could grant tokens a limited exemption if the resale of tokens was prohibited and caps were placed on the individual participation of ICOs. This shows that the SEC cannot deny that differences exist between the sale of tokens and securities.
The problem of token classification
Altcoins have proved difficult to classify throughout the world, and this is due to the unprecedented nature of their underlying technology and the vast differences between individual tokens. Clayton’s comments do not consider these differences, so simply asserting that all tokens are securities is superficial at best. Clayton’s “laundry token” analogy shows this as he admits tokens can be utilities as long as the intent is to use them rather than sell them — owning ten utility tokens does not necessarily indicate the intent to sell, so regulators need to provide a better framework to decide which tokens fall under their jurisdiction.
Those arguing that tokens are utilities believe they are better compared with gift card points as they are exchangeable for products and services provided by the issuer. This definition would make them exempt from SEC regulations, but it is subject to debate. Gift card points can’t be listed and traded on an exchange, but altcoins can even if the intent is for these tokens to be used within their own ecosystems.
Both sides have legitimate concerns, and this makes a consensus between the different schools of thought unlikely unless a better way of classifying tokens can be provided.
US regulators haven’t kept up with innovation
The US, like many nations, has fallen behind innovation. Blockchain technology is burgeoning, and it doesn’t show signs of slowing down. There are already thousands of tokens, and it seems unlikely that pre-existing laws could apply to them all.
The US could perhaps do well to look at the nations taking the lead on Crypto regulation. In Switzerland, FINMA published guidelines that seek to provide a better way of classifying different tokens. These guidelines recognize different token types including utility and asset (security) tokens, and a similar approach could provide a less controversial way for the SEC to decide which tokens fall under their regulatory umbrella.
Michael is an English and Creative writing graduate of Liverpool John Moore’s University, a former editor of several magazines, and a crypto-currency enthusiast. He is mostly interested in crypto-legislation and the potential of decentralized technology to change the world.