“We have a crypto family at the SEC.”
Yesterday, the Security and Exchange Commission (SEC) held its first Fintech Forum in quite some time with the event focusing specifically on distributed ledger technology (DLT or blockchain) and digital assets. The new tech has challenged the financial regulator as it struggles to apply law written decades ago before the internet existed to securities issuance. While the challenge is significant, each member of the SEC expressed their opinion that the technology holds great promise for the financial services industry.
During opening remarks, SEC Director of Corporate Finance Bill Hinman made several interesting comments. Hinman lauded the potential of DLT to streamline the transfer of securities as well as the potential for blockchain to create novel, asset-backed securities.
Hinman noted that blockchain can reduce cost and improve transparency for complex transactions. “We are eager to see this technology succeed,” stated Hinman. “We are committed to foster capital formation around these ideas.”
Alluding to the initial coin offering (ICO) days where issuers attempted to claim utility when the digital asset was clearly a security, Hinman said he hopes these days are behind us.
Hinman commented on the recent token issuance guidance and the Turnkey Jet no-action letter (NAL) specifically alluding to public criticism that the NAL was an “easy one.” The Turnkey Jet token has been questioned as to why it was even offered as a digital asset with speculation being it was more of a promotional effort to raise awareness of the service.
Hinman made an important statement on tradability and token issuance:
“… For instance if they [Turnkey Jet] needed relief for the secondary market for the token, that would not be outside the realm of a possible no-action letter.”
“We very much believe these tokens can evolve, ” said Hinman.
Hinman then went on to address the Reg A+ backlog of issuers seeking to issue digital assets. To date, not a single Reg A+ filing for a token has been qualified.
“As we go through these reviews, it has been a deliberative process to sort that out…”
Novel Securities, Novel Ideas
Hinman said they are working to get through these filings with potential issuers while pointing to intrinsic challenges and questions that arise in a sector with little precedent. Hinman said clarity as to how a token may “morph over time” is an important question for issuers to address if the intent is for the digital asset to become a utility.
“These are somewhat difficult issues and they do take some time,” explained Hinman. “We are working deliberately to get through that and we would love to see some issuers succeed in this area.”
Hinman’s statements provide insight into the SEC’s regulatory process for the nascent realm of digital assets. The statement that a token may trade, and not be considered a security, is new and provides hope for issuers that seek to issue a tradable digital asset and not fall under securities law. Of course, further clarification as to how this may actually manifest itself is needed and it seems that the SEC will set precedent on a case by case basis as the industry evolves. Future NAL’s will be key.