New SEC Framework Charts a Narrow Way Forward for Token Developers

Are Initial Coin offerings (ICOs) legal?  It’s hard to know, with a number of vague hints – and enforcement actions – suggesting that the SEC largely views the answer to be no.  And while the market is still well ahead of formal regulatory policy, some hints have finally been offered in a recently-issued “Framework for ‘Investment Contract’ Analysis of Digital Assets.” What does this mean for token developers?

Dr. George Cao, founder and CEO of Bitmax, still sees significant challenges ahead.  Bitmax currently is unable to do any work inside the United States, as some of the tokens they offer run afoul of SEC enforcement policy.  For Dr. Cao, a lot of the current issues stem from the early boom in blockchain investment.

“It became a bubble,” Dr. Cao said.  “Three people raising $20 million in seed capital on a white paper.  It was very similar to the dot-com bubble.  I smelled the danger and saw crypto winter coming. Now, for the market to really be healthy again, we need better processes on the tech side and more transparency and clearer valuation on the regulatory side.”

While this new framework doesn’t make everything clear – it explicitly notes it’s not an ironclad regulation, just a guidance note – it may provide a path forward for people charting the way.

“The letter provides a good roadmap for applying FinHub’s new framework when developing genuine utility tokens,” said Elaine Wyder-Harshman, a partner with Convex Legal, a Chicago-based law firm that specializes in securities and and emerging technology.

“This is good news for blockchain developers who want to use tokens for rights management, voting, account management, and delivery of services–for purposes other than a capital raise. As long as the buyer has no reason to expect a financial return on the purchase of a token, that token will likely not be considered a security. While not binding in the same way as a rule or regulation, the FinHub framework and TurnKey Jet no-action letter provide commonsense tools for blockchain developers as they design systems that rely on utility tokens.”