SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and Decentralization

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SEC | Commissioner Hester M. Peirce | Feb 6, 2020

Commissioner Hester M. Peirce - SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and DecentralizationThank you George [Chikovani] for that kind introduction.  I appreciate the opportunity to be with all of you today.  Before beginning, I have to remind you that the views I express are my own and do not necessarily represent those of the Securities and Exchange Commission or my fellow Commissioners.[1]  Indeed, the views I will express today are not fully formed in my own mind and may not reflect my own opinions in the months to come.  To that end, I welcome the feedback of all of you and anyone else with an interest in the regulation of digital assets.

Before detailing my proposal for a safe harbor, I will first outline the problem. Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network. In the course of building out the network, they need to get the tokens into the hands of other people. But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws. The fear of running afoul of the securities laws is real. Given the SEC’s enforcement activity in this area, these fears are not unfounded.

See:  Canadian Securities Regulators Publish Additional Guidance for Facilitating Crypto Asset Trading

There is, I think, a way to address the uncertainty of the application of the securities laws to tokens. The safe harbor I am laying out this morning recognizes the need to achieve the investor protection objectives of the securities laws, as well as the need to provide the regulatory flexibility that allows innovation to flourish. Accordingly, the safe harbor protects token purchasers by requiring disclosures tailored to their needs, preserving the application of the antifraud provisions of the securities laws, and giving them an ability to participate in networks of interest to them. The safe harbor also provides network entrepreneurs sufficient time to build their networks before having to measure themselves against a decentralization or functionality yardstick.

Getting into the specifics of the proposal, the safe harbor would provide network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met. This objective is accomplished by exempting (1) the offer and sale of tokens from the provisions of the Securities Act of 1933, other than the antifraud provisions, (2) the tokens from registration under the Securities Exchange Act of 1934, and (3) persons engaged in certain token transactions from the definitions of “exchange,” “broker,” and “dealer” under the 1934 Act.

The initial development team would have to meet certain conditions, which I will lay out briefly before addressing several in more depth. First, the team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal. Second, the team would have to disclose key information on a freely accessible public website. Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network. Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users. Finally, the team would have to file a notice of reliance.

See:  The UK Provides Legal Certainty For Smart Contracts And Cryptoassets In Its Landmark Legal Statement

Now that I have outlined the safe harbor,

I suspect some of you are asking, “Who cares?”  I get the point.  I am one of five Commissioners.  I cannot write rules unilaterally.  However, to quote another of the Boss’s songs: “you can’t start a fire without a spark.”[11]  It does not hurt to get the ball rolling.  People change their minds.

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share save 171 16 - SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and Decentralization