The Securities and Exchange Commission’s primary theory on whether a cryptoasset is a security appears to be based upon whether the blockchain project associated with a cryptoasset is, at any point in time, “sufficiently decentralized.” If so, the cryptoasset is not a security. This theory was first proposed by the SEC staff in 2018 to address ICOs, which were then all the rage, and was followed by more detailed staff guidance in 2019. But the theory has not aged well. It is impractical—if not impossible—to apply to today’s real life blockchain projects. It is not supported by existing judicial precedent, including the now crypto-famous Howey Supreme Court case. And it has resulted in market distortions that harm both market participants and long-term innovation in the crypto industry.
An intriguing new paper, The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities, points us to the right path. The paper analyzes the relevant caselaw and concludes there is scant legal basis to treat fungible cryptoassets as securities, and it sets out analytical approach that is far more satisfying. The paper separates capital raising transactions by blockchain project sponsors or other insiders in which a cryptoasset may be sold—which are typically securities transactions—from the treatment of the cryptoasset, which is not a security. This analytical framework addresses the now apparent challenges created by the SEC staff’s approach and appropriately focuses the SEC’s regulatory jurisdiction on capital raising transactions.
‘Enforcement 40’ for 2020
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