Thread by @PatBerarducci

0/ My thoughts after a quick read of @TheFCA just-issued consultation paper “Guidance on Cryptoassets,” including a comparison to the US securities laws:

fca.org.uk/publication/co…

1/ First, I notice that@TheFCA uses “cryptoasset”, which should make @cburniske happy.

2/ But there’s lots more to make everyone in the industry happy. It’s a great sign that @TheFCA recognizes the importance of clearly articulating the regulatory boundaries for cryptoassets — e.g.:

3/ @TheFCA guidance does, in fact, come across as helpful and clear. They provide case studies similar to @MAS_sg, which are helpful for entrepreneurs to really understand the contours of how rules will be applied. And they explain their specific policy concerns.

4/ @TheFCA guidance is particularly clear, I think, because it focuses on “intrinsic” characteristics of cryptoassets — e.g.: "We consider a token to be a security based on its structure: the intrinsic nature of the token is important, not the mechanism by which it was acquired."

5/ Focusing on the intrinsic characteristics of a crypto asset is an approach I’ve discussed, and that we’ve written about through @TheBKP_Official and @GlobalDigitalFi. Unfortunately, in the US, extrinsic characteristics play an outsized role in the SEC’s analysis.

6/ We’ve written about this interplay between securities laws and intrinsic and extrinsic characteristics of a cryptoasset @TheBKP_Official (bit.ly/bkp-taxonomy-v1).

7/ And also @GlobalDigitalFi (gdf.io/wp-content/upl…)

8/ To be fair, extrinsic characteristics is not a concept that the SEC has just made up. Some legal authority recognizes they may have relevance in determining whether an “investment contract” exists, and the SEC is aggressively interpreting that authority related to cryptoassets

9/ I hope to write more soon about why I think US law nevertheless should also emphasize intrinsic characteristics, especially in the case of software tokens that are inherently and entirely usable or consumable.

10/ I won’t go down that rabbit hole here, but it’s worth reemphasizing the problem that’s being created in the U.S. because we currently lack the clarity that @TheFCA and other regulators are providing.

11/ In short, many reputable investors and consumers/users in the US are hesitant to support or participate in token networks, especially where there is a possibility that the token may appreciate in value.

12/ This is true even for pure consumer utility tokens, because there is confusion around when, in the eyes of the SEC, an inherently consumptive software token might nevertheless be considered a “security” due to “investment" potential.

13/ In contrast, @TheFCA is proposing a standard that is clear: "Much like exchange tokens, utility tokens can usually be traded on the secondary markets and be used for speculative investment purposes. This does not mean these tokens constitute Specified Investments.” (3.52)

14/ Likewise, the @MAS_sg has been clear that “investors” buying consumer utility tokens do not make those tokens a security. (See bit.ly/MAS-tokens, Case Study 8.)

15/ As a result, projects in the US struggle, comparatively speaking, to find both investors and users. That’s a problem, and it’s a problem that will become increasingly important in 2019 as the industry continues moving beyond “ICOs” towards actual usable software.

16/ To be clear, I’m hopeful the SEC will end up in the right place — ie, usable/consumptive software is not an “investment contract” or security. I think some of statements have tried to say this but have lacked the scope and clarity of those from @TheFCA and other regulators.

17/ I think it’s also important to note that @TheFCA, like @MAS_sg, isn’t trying to evaluate the “functionality” of software. In contrast, there has been some rumbling that the SEC wants a token to be “fully functional” before it’s not a security — eg:

https://twitter.com/conor0hanlon/status/1083802612707676161?s=21

18/ The approach of @TheFCA and @MAS_sg strikes me as much better from a legal and policy perspective. I don’t know what “fully functional” software means, but . . .

19/ I’m confident we won’t benefit from having innovators design their software dev cycle around delivering not the best product through rapid iteration and improvement but rather a “fully functional” product in the eyes of the SEC or judges.

20/ All of this is particularly important because, the reality is, U.S. federal securities laws aren’t designed and don’t work for assets that are not passive investment instruments but rather are usable/consumable software. See:

https://twitter.com/PatBerarducci/status/1087362849385730048

21/ In the US, the House is considering a bill that would, among other things, effectively align US law with the approach proposed by @TheFCA and other regulators. You can view and provide feedback on that legislation here:
bit.ly/us-token-taxon…

22/ To be clear, I’m not arguing that rules don’t or shouldn’t apply to cryptoasset sales/distributions. As @TheFCA points out (and as @dcsilver likes to say), other rules still apply. And maybe new laws will or should be created.

23/ But it’s becoming increasingly clear, I think, that the rules applicable to passive financial instruments in a business (e.g., equity, debt) aren’t necessarily the right rules to apply to software tokens that are entirely usable or consumable.

24/ All in all, a welcome addition to the public discussion by @TheFCA. I encourage everyone to read their consultation paper and submit comments. I think we’re moving in the right direction!