The new US Token Classification Bill, submitted to the US Congress on December 20 last year, aims to make a clear distinction between securities and tokens. Will it free the cryptocurrency world from the all-seeing eye of the SEC?
The year 2018 has shown that the US Securities and Exchange Commission (SEC) classifies most crypto tokens as securities. Most often, ICO tokens came under their hot hand. SEC, of course, did not touch bitcoin and ethereum, but the position and efforts of the agency led the majority of ICO to a standstill.
However, soon it seems that the SEC will have to loosen control over the cryptomere due to the imminent adoption of the “Token Classification Law”. If this law is adopted, it will change the age-old securities regulations, and many digital tokens will in fact be exempted from their current status of “securities.”
Why SEC is concerned with digital tokens
According to the SEC, the rules for securities can and should be applied to ICO tokens, because they are investments – just like securities. In addition, the current securities regulations are aimed at protecting investors from risks. That is, according to the SEC, such laws should be applied due to the fact that some ICOs are fraudulent, and some simply lose their value over time. In general, the agency sought to maintain control over the ICO in order to make the cryptocurrency market more secure.
Unfortunately, SEC supervision as a whole has had a detrimental effect on the cryptocurrency sphere. For example, the SEC rules allow only accredited investors to buy ICO tokens. In addition, the ICOs themselves began to completely exclude American investors, even accredited, in order to simply “not run into” the SEC.
There are many SEC opponents who claim that most new tokens have very little in common with securities. Some tokens are better classified as “useful tokens,” since they are not investments as such – despite the fact that their market price may increase. They are most often intended to be exchanged for goods or services. Nevertheless, the new bill in Congress abolishes the duality associated with “securities” and “utility”, considering tokens as something more complex.
What does the bill take into account?
The “Token Classification Law” aims to draw a clear line between digital tokens and securities. As already mentioned, the project takes into account not only the purpose of tokens. He delves into the nature of tokens and considers the following four factors:
Origin of tokens: For an asset to be considered a digital token, it must be intended for transactions; the creation of tokens and their delivery should not be controlled only by a single business entity. The bill also takes into account the “initial distribution” of tokens, in which they should also be classified as “digital tokens” and not as “securities”.
Availability of a distributed registry: Digital tokens must have a transaction history recorded in a distributed digital registry that relies on a “mathematically verifiable consensus mechanism”. This also means that most blockchain tokens — especially on public blockchains, such as Bitcoin and Ethereum, should be considered digital tokens.
At the same time, the consensus mechanism also should not be controlled by a single company. It can also mean that tokens of private blockchains can be considered securities, since such blockchains imply centralized control. This is an important distinction, since financial institutions often use private blockchains to tokenize securities.
Nature of transactions: Digital tokens must be negotiated directly between two persons “without intermediary custodians.” It does not specify which intermediaries are involved. In general, the presence of “intermediaries” excludes “direct” transactions. It seems that this rule may somehow relate to banks and exchange services, and lawmakers will probably have to consider these points in more detail in the future.
What a token represents: Digital tokens should not be of “financial interest in any company.” Since it is investments in any company that usually represent securities, tokens representing such investments will also have to be considered securities. At the same time, the authors of the draft law do not specify whether tokens representing other securities (for example, related to real estate) fall within the scope of this rule.
Given the above rules, the bill also explains the procedure for amending two other laws – the Securities Act of 1933 and the Securities Exchange Act of 1934. In essence, they will be modified in such a way as to prevent the definition of securities from embracing the concept of “digital tokens”. That is what would have allowed the majority of cryptocurrency to be freed from the rules for securities.
What will change in general?
If this law is adopted, it will untie the hands of the investor.
