A recent bipartisan letter from Members of Congress seeks clarification from SEC Chairman Jay Clayton as to the status of digital tokens and cryptocurrencies under the federal securities laws. The signatories expressed their view that not all digital tokens should be deemed securities, and voiced their concern that the SEC should not use its enforcement mechanism alone to craft policy on this issue. Instead, the Members advocated in favor of formal SEC guidance to clear up “uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.”
- The SEC should clarify the criteria used to determine when offers and sales of digital tokens should properly be considered “investment contracts” and therefore offerings of securities.
- Describe the tools available to the SEC to offer more concrete guidance to innovators on these topics.
The letter also posed several questions:
- Can a token originally sold in an investment contract nonetheless be a non-security, as Mr. Hinman stated?
- Can the resultant token be analyzed separately from the original purchase agreement, which may clearly be an investment contract
- Could the resultant token be a non-security?
We believe the SEC answered many of these questions in its DAO Report, which expresses official agency policy on the digital token issue. Given the rapidly evolving nature of the crypto industry, we are uncertain that the SEC will seek to provide any further formal guidance so that it can remain flexible in its response to changing conditions. But the letter is another promising sign that Congress is becoming more familiar with the digital asset space and more sophisticated in its understanding of the related legal issues.