1/ Now that I’ve had a minute digest: While yesterday’s SEC announcement was helpful clarity for the industry as a whole, it is really, remarkably, exceptionally bad news for a) custodial providers, b) exchanges and c) OTC desks who trade tokens today.
2/ I don’t believe there will be further warnings from SEC for the custodians and exchanges. SEC gave us about as clear guidelines as they can on what they think constitutes a security: the great majority of the currently-trading tokens.
3/ Exchanges, OTC desks and custodial wallets dealing in these tokens, in SEC’s view, will need to (a) register as National Securities Exchanges or ATSes *and* (b) stop accepting non-accredited users. That’s a black swan event for many of the big names out there.
4/ Alternatively, I guess the token issuers could all file S-1s and the coffee cup that just shattered on the ground next to me might jump back up onto the table re-formed in whole. Even if that happened, though, the exchanges would still need to register.
5/ It’s not all doom and gloom though. Issuers can now sell prefunctional tokens *to the retail public* using Reg A+, JOBS Act, etc. What’s more, the US retail public can legally trade them on exchanges! …just not the ones with money transmitter or trust licenses.
6/ The US regulatory landscape for tokens shifted out from underneath most of the exchanges overnight.
7/ Now, a bit about “decentralization”. I can’t imagine SEC is directly concerned with the number of nodes, likelihood of a sybil attack, etc. Instead, decentralization seems to ask the question “What is primarily responsible for any expected increase in value of the token?”
8/ If most token purchasers are still expecting the issuer or promoters to expend their technical and managerial expertise to make the thing work, for example, then the thing is probably not truly “decentralized”
9/ Node concentration and other technical characteristics can drive the question of decentralization, but they aren’t part of the standard itself. Technical decentralization != decentralization for the purposes of the US securities laws.
10/ So how can we tell if a network is sufficiently “decentralized” to escape SEC oversight? Well, it is heavily dependent upon the facts and circumstances, economic realities, etc. but I’m willing to propose a framework for thinking about it:
11/ The degree of risk of security status is directly proportional to the difference between a) all of the promises made by the issuer in the whitepaper, website, banner ads, etc. and b) all of the things actually working today.
12/ Yes, that probably means SEC thinks 95% of all the tokens out there today are securities and the exchanges that trade them are #breakingthelaw.
13/ Why not? Any potential reliance, if executed properly by the issuer, would be offset by the token’s immediate redeemability for a good or service. The consumptive purpose use should outweigh the speculative purpose of the token.
14/ Another example is the practice of “airdrops” of utility tokens. These very rarely result in securities offerings. Why not? It’s at once simpler and more complex than many commentators have made it out to be.
15/ The definition of an “investment contract”, unlike the definition of a “security” requires an “investment of money”. All of the precedent on free giveaways of securities involved things that were independently securities, like stocks.
16/ So, lots of new limitations imposed by yesterday's guidance. But plenty of possibilities remain. Like we said in the SAFT whitepaper, apply the securities laws when they're most effective; commodities laws when they aren't. Not a bad result for most.
