In a recent speech to the Federal Reserve Bank of Philadelphia, U.S. Securities and Exchange Commission (SEC) chair Paul S. Atkins discussed the SEC’s approach to digital assets, which has been termed “Project Crypto.”
“At its core,” said Atkins, “it is about basic fairness and common sense as it relates to the application of the federal securities laws to crypto assets and related transactions.”
Central to Project Crypto is the establishment of what Atkins has called a “clear token taxonomy,” based in the longstanding Howey investment contract securities analysis. As applied, the Howey Test as outlined in SEC v. W.J. Howey Co. (1946), uses the presence of an investment contract to determine if tokens are securities. “I believe that most crypto tokens trading today are not securities,” he said. Atkins did allow, however, that a token as part of an investment contract “might have been sold.”
Atkins reaffirmed his view that while digital collectables are not securities, “tokenized securities are and will continue to be securities.” Digital collectables perform a function, he said, such as serving as a ticket, membership credential or identity badge, but their owners do not expect to profit from the actions of their managers. However, he said, tokenized assets “represent the ownership of a financial instrument enumerated in the definition of “security” that is maintained on a crypto network.”
“A stock is still a stock whether it is a paper certificate, an entry in a DTCC account, or represented by a token on a public blockchain,” said Atkins. “A bond does not stop being a bond because its payment streams are tracked using smart contracts. Securities, however represented, remain securities.”
“Just because something is called a ‘token’ or an ‘NFT’ does not exempt it from securities law he said. Atkins also cautioned that because a token was once part of a capital-raising transaction, it is not “magically converted” into stock of an operating company. “Economic reality trumps labels.”
Atkins called the principles he discussed “hardly novel,” noting they are rooted in United States Supreme Court decisions that direct the regulator to consider the substance of a transaction, rather than its form, when considering if securities laws apply.
While Atkins expects that the regulator will consider a series of exemptions to create “a tailored offering regime for crypto assets” connected to investment contracts, he also advises that the SEC will continue to protect investors from securities fraud. “If you raise money by promising to build a network, and then take the proceeds and disappear, you will be hearing from us, and we will pursue you to the full extent of the law… fraud is fraud.”
The SEC’s Approach to Digital Assets: Inside “Project Crypto” is available for download from the website of the Securities and Exchange Commission.
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
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