BitOoda Global & Regulatory Analysis, 2/10/2020: SEC Commissioner’s Safe Harbor proposal a positive catalyst for regulatory modernization
The focus of our regulatory report this week is a no-brainer, with SEC Commissioner Hester Peirce officially unveiling her proposal to provide new token projects with a three-year safe harbor period in a speech on Thursday. CoinDesk provided a good factual summary of the proposal, which will be discussed among the Commissioners and approved if endorsed by a majority.
From a broad perspective of moving past the conservative, Howey-based approach taken by the SEC to date, this proposal is an encouraging step forward and long-overdue starting point to work around the decades-old securities laws that have hamstrung the Commission’s efforts to adapt to a new asset class. The proposal opens the doors for the development of new platforms and financial technologies, while putting in place provisions (such as public disclosures, specific milestones, and reporting requirements) to ensure continued investor protection.
In presenting the proposal, Peirce publicly and directly posed questions that have been vexing those of us trying to operate compliantly, such as: “if the token seller is simply discussing the potential for an increase in the value of a token in the same manner that a seller of any number of other consumer products might appeal to purchasers’ desire to buy a product of lasting or even increasing value, it there an investment contract?” If so, “then is there any end to the Commission’s authority?” These are issues that the SEC has not effectively addressed (or even attempted to address) to date, but which are critical to defining how it will broadly govern digital assets.
Looking at the more relevant implications for BitOoda — those related to secondary trading — we see this program potentially broadening the pool of assets with active secondary markets, which could open up new trading opportunities for clients. We are certainly encouraged by Peirce’s recognition of the importance of creating liquidity via secondary market trading, and her focus on the use of regulated platforms with appropriate licenses and compliance measures in place.
We see three potential challenges that could emerge if the proposal is adopted:
- For token projects accepted into the safe harbor program and defined according to its terms, the question of token classification and regulatory treatment would be moot. However, for existing tokens or those not under the safe harbor umbrella for whatever reason, their treatment under securities law and SEC regulation could be even muddier than it is today.
- This proposal comprehensively addresses the area in which we have seen the most SEC enforcement activity — token offerings — but it does little to help in other areas where regulatory ambiguity continues to cause market uncertainty. For example, we see this potentially complicating the question of who is required to register as a Broker Dealer in order to trade compliantly.
- Despite the statements reinforcing the preservation of the SEC’s anti-fraud authorities, we would be wary of bad actors seeking loopholes and shortcuts to take advantage of this new regime to conduct fraudulent activities or seize an unfair market advantage.
Despite these questions we would pose to Commissioner Peirce as she continues to move this proposal forward, we applaud her effort to enable a more modern approach for the SEC, and encourage her to continue broadening the scope of new proposals in response to industry calls for clarity in a number of areas. BitOoda continues to be on the forefront of this dialogue through our participation in the Association for Digital Asset Markets (ADAM) and our strong partnerships across the space.