1/THINKING MORE abt @HesterPeirce’s proposal for a token safe harbor, which really does advance the ball re US SEC issues. As per my pvs tweets, there are issues that still need to be addressed—basic one is whether the tokens are presumed securities during the safe harbor or not.
2/ If yes, then the proposal opens at least 2 cans of worms—the custody question + creates probs for issuers outside the US (where many countries recognize that tokens aren’t necessarily securities but if the US thinks they’re securities then other countries may follow)...
3/ The custody question is YUGE. If they’re presumed securities, then the Custody Rule & Customer Protection Rule probably apply. This means custodians must provide “good control location” (among other obligations), but there’s zero clarity on what that means for security tokens.
4/ Per the joint SEC/Finra guidance last summer (footnote 13), banks have a safe harbor for good control location—but since the FDIC isn’t allowing US banks to custody digital assets as of now, no custodian can provide that safe harbor (until a #Wyoming SPDI gets chartered!).
5/ So this proposal moves the ball but there’s still a big catch-22 preventing the security token industry from flourishing in the US. BUT, on the other hand, if the tokens aren’t presumed securities during the 3-yr grace period, then they’re property. States, not the SEC, have..
6/...jurisdiction over property. So, for the proposal to work, the SEC would need to cooperate with the states. This matters a lot, bc property & securities are treated differently under commercial law (diff negotiability, diff ways of perfecting security interest, etc).
7/ Some states may object to expansion of the SEC’s jurisdiction beyond securities (as they did with the OCC’s attempted expansion of jurisdiction with its fintech charter, which the states have pretty much succeeded in blocking via the courts). If other states adopt #Wyoming’s..
8/...#utilitytoken law, it could work—but more states would need to adopt that (it’s just the Rocky Mtn states that have thus far). I suspect many more states would welcome the ability to clarify this & would adopt this approach if the SEC proposal would fit well with state laws.
9/ Net-net, this is a positive proposal. Lots more clarification needed to make it workable in practice, but it certainly has started the discussion! Well done @HesterPeirce! 🤠
