(KrowneLaw Reports from Consensus 2018 in Manhattan)
Speaking to the Consensus conference in New York on May 14, 2018, Commodities Futures Trading Commission (CFTC) Commissioner Brian Quintenz revealed that US regulators are actively working on a legal framework to treat blockchain tokens and ICOs, in particular, addressing the question of if and when they are securities. The remarks are intriguing for crypto market players, as Quintenz specifically addressed the unique nature of crypto tokens in various respects, including that they can “evolve” from security to non-security (“utility”) tokens.
Some highlights of Quintenz’s remarks:
- The CFTC is actively working with the SEC on the question of crypto token securities status, and a decision on treatment is “imminent” (suggesting, specifically, that it would occur this year). Quintenz suggested regulatory harmony was a goal, saying “the last thing that we want is for our agencies to take different views publicly.”
- Quintenz said “Crypto-assets can evolve, or actually change,” and the status determination partly hinges on whether a token (even if originally a security) has a use, e.g., blockchain-based smart contracts, at which point it could cease being a security. Quintenz also picked up on and re-emphasized previous comments by SEC Chairman Jay Clayton and Commissioner Hester Peirce suggesting that cryptos might be able to evolve away from securities status.
- Quintenz suggested that governance of updates over blockchain software and “forks” are part of the question regarding securities status.
- Quintenz encouraged the industry to create a self-regulatory entity – “Because of the lack of any federal oversight authority… I’ve called for these platforms to come together and establish some kind of self-regulatory group.”
- Quintenz rejected the idea that the Financial Stability Oversight Council take up the charge in leading the crypto regulatory effort, saying “I can really think of no worse approach than regulating fintech by viewing it solely through the lens of its downside risk.”
On balance, this is tremendously positive. While we don’t know the specifics yet, and the “devil may yet be in the details”, Quintenz’s remarks signal an accommodating regulatory approach that recognizes the unique attributes and usage scenarios of cryptocurrencies and ICO, rather than continuing to try to cram them into a legal framework that never contemplated them.
Quintenz’s overtures continue a burgeoning trend within the US of recognition of crypto token status beyond traditional securities. In a notable recent example, back in March 2018, Wyoming passed HB-70, a bill which creates a “utility token” asset class as distinct from securities (it also passed four other associated bills carving cryptos out from money-transmittal licensing and creating other blockchain benefits). These moves have sparked a wave of interest in the US in Wyoming as a blockchain venture setup location. Perhaps more significantly, they created a new opening in US law for the treatment of cryptos differently than traditional assets and arrangements, in particular, as some level of federal deference must be given to state law determinations.
Other global jurisdictions, e.g., Gibraltar and Bermuda, have in recent months announced ICO and crypto regulatory frameworks that acknowledge the unique properties of blockchain and associated services and fundraising scenarios, and generally seek to accommodate them, while still applying sensible regulation.
Such developments may have been on the CFTC and SEC commissioners’ minds of late, as they have approached the question of how to create a unified and well-fitting approach to cryptos.
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