Hester M. Peirce, Commissioner of the Securities and Exchange Commission ("SEC"), recently proposed a draft framework to be utilized by token development and exchange entities. As detailed by Peirce, the SEC has created a "regulatory Catch 22" for token development and exchange entities—networks cannot sell or distribute tokens because those tokens might be subject to securities law, but without distribution or sale creating decentralized networks, exchanges cannot get around the certain conditions of securities law making those tokens subject to SEC regulation.
Commissioner Peirce laid out a draft framework where crypto development and/or exchange startups will have a three-year grace period in which to operate. During the grace period, those startups will be able to avail themselves of certain securities law exemptions, primarily:
- Exemption from provisions of the Securities Act of 1933 (the "1933 Act") related to the offer and sale of tokens (other than the antifraud provisions);
- Exempting the tokens from registration under the Securities Exchange Act of 1934 (the "1934 Act"); and
- Exempting persons engaged in certain token transactions from the definition of "exchange," "broker," and "dealer" under the 1934 Act.
To avail themselves of the proposed exemptions, token developers and exchanges must be intending for their networks to reach maturity within three years. Reaching maturity should allow these token developers and exchanges to create products no longer subject to certain provisions of securities law as those provisions are currently interpreted and enforced. Preserving the antifraud provisions of the 1933 Act ensures that token purchasers should continue to receive relevant and appropriate disclosures about the tokens being exchanged.
This framework is still a draft proposed by Commissioner Peirce, but adopting this or a similar framework could go a long way to alleviating some of the regulatory confusion and cost with which blockchain and token startups currently must deal. Commissioner Peirce's full comments can be found here.