Today there was a congressional hearing with testimony from SEC's corp fin group (the group w/primary responsibility for policy). The testimony outlined that the SEC is taking a measured and reasonable approach to token sales. Some highlights below:
financialservices.house.gov/calendar/event…
financialservices.house.gov/calendar/event…
Question from Rep Emmer: "Let me ask you a question about that—is it possible that a utility token would not be a security because it’s not done for capital formation?""
Hinman (SEC): "It is certainly possible that there are tokens that would not have the hallmarks of a security, and over time, many of those fundraisers are intended to develop networks where a token may be intended to buy a good or service and that’s it’s only use ..."
In other words, as previously stated by Chairman Clayton, the SEC's current view still seems to be that not all tokens will necessarily be deemed securities if the token is intended to used to access or purchase a good or service.
Question from Rep Emmer: "a utility token is nothing more than a card, if you would, that will allow you to access a certain platform so that you can participate. Is it possible, in your jurisdiction, that may not qualify as something that is not a security offering?
Hinman (SEC): "We can certainly imagine a token where the holder is buying it for its utility, not as an investment . . ."
Hinman (SEC): “..., and those cases, especially if it’s a decentralized network where it’s used and not central actors where there would be information asymmetries where they would know more than token investors."
The SEC seems concerned about people buying utiity tokens as an investment. Query what that means for pre-sale, SAFTs, and other agreements where tokens were bought by "investors."
The SEC is also placing weight on the lack of an intermediary for these networks. Others have pressed on this point. I am skeptical that the notion of "decentralization" can be applied in a workable test without creating technology specific regulation.
Question from Rep Emmer: "How can we improve regulatory clarity for entrepreneurs here in the United States so that their contribution to something that may not be a security will not see enforcement by the SEC?"
Hinman (SEC) "One of the things we are doing is meeting with participants that have these ideas of a token that shouldn’t be regulated as a security to work through with them how that should be structured."
The SEC has been engaged with industry, academics, and others and is exploring ways to make all of this work. The U.S. tends to be pragmatic and support technology.
My hope is that there likely will be one (or hopefully more) pathways forward for those that are attempting to build powerful blockchain-based networks and services.
That being said, there was some concerning questions from other congressmen, including one comment where bitcoin was being referenced as a security.
There is some superficial appeal to treating bitcoin and other tokens as a security. If it’s just a speculative asset (the flip side of the current "store of value” narrative or the way many token projects are being treated by the public).
However, I hope that we don’t down that path. These types of arguments could conceivably gain legs, given the heavy emphasis by some that tokens in some way mutate.
Certain tokens could start as a commodity and then mutate into securities as networks consolidate and begin to exhibit less utility.
There’s no logical boundaries for these types of arguments so they become dangerous and likely will have unforeseen consequences. In any event, this was the most significant and fulsome commentary by the SEC on tokens to date.
