The SEC’s New Tokenized Securities Venue Exemption: What it is… and Isn’t

On September 17, 2026, the SEC surprised the digital asset world by dropping Release No. 34-106402 (File No. 4-927), granting temporary, conditional exemptive relief that, for the first time, provides purpose-built regulatory treatment to on-chain trading venues for tokenized equities. Two exemptions come out of it: one from the definition of “exchange” in Section 3(a)(1) of the Securities Exchange Act (the “Exchange Act”) for what the release dubs a Tokenized Securities Venue (“TSV”), and a second from the definition of “dealer” in Section 3(a)(5) of the Exchange Act for certain liquidity providers into those venues (“Covered Firms”). Both run from September 17, 2026 through September 17, 2031, and both come with a long list of conditions.

This is a genuinely significant development, and I want to walk through what the SEC’s order actually says and does—before discussing how the scope—and therefore impact—of the order is significantly narrower than the breathless early headlines have suggested.

What the SEC Actually Did

The SEC set out to solve a problem (one of many in the “blockchain markets don’t fit traditional securities markets regulations” category). An automated market maker (“AMM”) from the crypto world—a smart contract that prices assets off the ratio of the two (or more) assets sitting in a liquidity pool—is functionally a trading venue. Under the Rule 3b-16(a) of the Exchange Act, something that brings together the orders of multiple buyers and sellers using “established, non-discretionary methods” is a securities exchange, full stop (“exchange,” as used by the SEC, and in this article, includes traditional national exchanges like NASDAQ and NYSE, as well as private alternative trading systems (“ATSes”)). And an AMM is nothing if not an established, non-discretionary method. So just get your security token AMM registered as a securities exchange or ATS, right?

Wrong. The trouble is that an AMM cannot easily be an exchange in the Regulation NMS sense (“NMS” comes from “NMS security,” which essentially means securities that can be listed on traditionally-regulated securities exchanges). The SEC spells this out in the order explicitly: an AMM prices off internal pool ratios without reference to external quotations, so it can’t comply with the Rule 611 trade-through requirement; it has no member broker-dealers whose best bids and offers can be collected and attributed under Rule 602(a); and AMM pricing in six-to-eighteen decimal places doesn’t sit comfortably with the minimum pricing increments of Rule 612. So, attempt to register an AMM as an exchange or ATS, and you’d have to break the system and introduce a slew of off-chain organizational bureaucracy for not purposes other than to comply with the rules written for a world where that bureaucracy was functionally necessary.

So rather than force the square peg into a round hold, the SEC (or the “Commission,” in this post) exempted the peg. A TSV meeting the conditions of the order is not an exchange for Exchange Act purposes, is not required to register under Section 5 or operate as an ATS under Regulation ATS, and—critically—is not a “trading center” or “market center”—so Regulation NMS simply does not reach it.

Under the new order, a TSV is defined as “an organization, association, or group of persons that brings together buyers and sellers of Tokenized NMS Stock” by (1) providing one or more AMM liquidity pools for permissioned participants to interact and agree to trade terms, and (2) setting the standards for who gets access. “Providing” is interpreted functionally: you provide a pool if you designate it as the venue for trading, deploy the AMM smart contract, set or alter pool parameters, set fees, or hold the ability to pause trading. Merely encoding a smart contract to whitelist a pool, as an administrative act, does not by itself make you a TSV.

“Tokenized NMS Stock” means an NMS stock tokenized either by or on behalf of the issuer, or by an unaffiliated third party. It expressly excludes synthetic exposure instruments—tokenized linked securities, tokenized security-based swaps—and excludes rights and warrants. Eligible trading pairs are limited to another Tokenized NMS Stock, a non-security crypto asset (a GENIUS Act payment stablecoin being the obvious case), or a tokenized money market fund, and any such paired asset must be directly paired with a Tokenized NMS Stock to be eligible at all.

The Conditions, in Brief

Here we discuss the main conditions imposed by the order to take advantage of its core exemption:

Public, permissionless infrastructure. The TSV’s smart contracts must be auditable, public, and deployed on a public, permissionless distributed ledger—notwithstanding that the pool itself is permissioned. The Commission expressly notes a permissioned pool can live on a permissionless chain.
U.S. person status, which pulls the venue into full OFAC compliance as a matter of law. (So, you can’t run one of these offshore!)
A 30-day advance public Notice, in plain English, on the venue’s website, prior to launch, with written notice to the Division of Trading and Markets within one business day, plus revised Notices on defined triggers. The required contents of that Notice run to roughly thirty enumerated items—governance, permissioning criteria, tokenization processes, fees, off-chain functionality, conflicts, clearance arrangements, systems safeguards. (Additional notice triggers include: five business days for commencing/ceasing a symbol or receiving an issuer objection; twenty calendar days in advance of any material change; quarterly for non-material changes).
Issuer notice and objection, discussed below.
No primary issuance. No initial securities offerings are permitted on a TSV, and all offers and sales must still be registered or exempt under the Securities Act.
Economic equivalence. The TSV must verify that the token confers the same rights and privileges as the underlying class—same economic interest, same dividends, same votes, same liquidation share. Where a third party did the tokenizing, that third party must distribute proxy materials and issuer communications at no cost to the issuer or the shareholders.
Symbol and volume caps, keyed to the National Market System Plan to Address Extraordinary Market Volatility (“LULD Plan”) tiers. Tier 1 (S&P 500, Russell 1000, certain ETPs): 75 symbols, and no more than 0.25% of the prior month’s average daily share volume in each name. Tier 2 (everything else): 250 symbols and 2.5%. Affiliated TSVs aggregate. The first volume breach in a given name incurs no penalty; every one after that forces a three-month pause in that symbol.
Transaction transparency. USD-denominated, machine-readable, freely public trade data—symbol, price, size, time, direction—updated within ten minutes and covering a rolling thirty days, plus pool address, daily pair volume, and end-of-day pool size.
Halt concurrency. Trading stops when the primary listing exchange stops, with immediate participant notice.
No leverage. No borrowing, no hypothecation, no extension of credit to buy on the venue.
No claiming registration or approval, plus an affirmative disclaimer that the venue is not registered.
Books and records kept in the United States, preserved for three years after the relief ends, produced promptly in human-readable and reasonably usable electronic form, with standing consent to Commission examination at any time.

And a final overriding condition on all of it: no one subject to statutory disqualification under Section 3(a)(39) (i.e., the Exchange Act “bad actor” provisions for securities intermediaries) can rely on the exemption, absent SRO or Commission permission.

The Covered Firm Exemption

The second exemption is the quieter, and in some way, the more interesting one. Liquidity providers who commit proprietary capital to an AMM pool are, the Commission says, ordinarily traders rather than dealers. But the moment an LP starts quoting prices to customers, or enters into a committed-capital arrangement with the venue, the dealer/trader line gets uncomfortably blurry—and Section 15(a)(1) is not a statute you want to be guessing about.

So the Commission exempted them, conditionally: proprietary trading only, no customer assets held or custodied, activity confined to pools operating under the TSV Exemption, records of liquid assets and of every liquidity-provision agreement and incentive arrangement, public disclosure of non-registration and of the compensation arrangements, and a notification filing with the Commission. Same statutory-disqualification bar (extended to affiliates), same five-year clock.

Notably, the Commission says the plumbing justifies it: without committed liquidity, “the automated pricing and execution mechanisms of AMMs related to AMM Liquidity Pools cannot operate as designed.” That is a regulator reasoning from granular market structure rather than from category labels, which is very encouraging to see.

What This Exemption Is Not

Here is where I have to throw some cold water on things, because digital asset markets participants who aren’t securities law experts are likely to over-extrapolate from the headlines:

It is not relief for private or early-stage security tokens. This is the big one. The relief is scoped to NMS stock (defined earlier). This is not simply any security; it is traditionally-listed equities and certain ETPs. Your seed-stage cap table, your real estate-backed RWA token, your crypto project token that is deemed to be a security under a Howey + SEC guidance analysis, your tokenized Reg D or Reg A+ offering, your tokenized LLC units—none of it is Tokenized NMS Stock, and none of it can trade on a TSV. In other words, no new secondary market access.

But for good measure, the order closes the door from the other side too: no primary issuance; i.e., no initial security token offerings, and no relief from Securities Act registration for any offer or sale whatever.

Startups and community-centric projects therefore get nothing directly usable from this order—not for their own token issuance, and not in the form of a venue where their tokens could trade. The secondary-trading problem for unlisted security tokens, which has been the single biggest practical obstacle in this space for the better part of a decade, remains exactly where it was: ATS registration, Regulation CrowdFunding or a Reg A+ structure with a broker-dealer, or nothing.

It is not carte blanche even for qualifying securities. This deserves emphasis, because the phrase “tokenized stock is now legal to trade” is going to get said a lot, and it isn’t quite right. Where a Tokenized NMS Stock was created by a third party unaffiliated with the issuer—which is the entire wrapper/depositary-style model—the TSV must give the issuer written Issuer Notice, delivered to the principal executive offices listed on the issuer’s Exchange Act cover page, and cannot begin trading for at least 30 calendar days. But, as discussed above, the issuer can object, and that’s the end of that.

To be sure: this is a notice-and-veto mechanism, not affirmative consent. An issuer that does nothing for 30 days is deemed to have not objected, and trading may proceed. But the practical effect is the same—the issuer holds the power. Nevertheless, there’s a very real possibility that NMS stock issuers will generally object – except in situations where they are in control, or at least receiving a cut of the action. Anyone modeling a third-party tokenization venue should assume that a meaningful slice of the S&P 500 will say “no,”— and should assume that at least a few will say no loudly.

Layer on the per-name economics and the picture sharpens further. On the Commission’s own 2025 figures—a weighted daily average of roughly 3.0 million shares for Tier 1 names and 1.2 million for Tier 2—a 0.25% Tier 1 cap works out to something on the order of seven thousand shares a day in a typical large-cap name, and 2.5% of Tier 2 to roughly thirty thousand. That is a pilot program, not a market. Which, to be fair, is exactly what the SEC says this exemption is.

It is not a registration, a license, or an endorsement. A TSV operates outside the exchange framework, which means no fair-access obligation and—as the mandated disclaimer must state outright—no Commission review of access denials. The venue can exclude whomever it likes. Anti-fraud and anti-manipulation liability under Section 10(b) and Rule 10b-5 is entirely untouched, as are the Investment Company Act, the Securities Act, and every participant’s own registration and AML/CFT obligations. A broker-dealer trading on a TSV is still a broker-dealer with all that entails; the order says flatly that it “does not apply to nor address the regulatory or registration status of securities activities performed by TSV Participants.” And a registrant that wants to run a TSV must keep the TSV operation separate from its registered activity.

And finally, it is not permanent. The order provides an exemption lasting five years, expressly framed as an interim measure while the Commission considers rulemaking, and expressly modifiable under Section 36 at any time.

Why It Still Matters

Despite the caveats, this is encouraging progress. Look at what the SEC conceded, which is actually quite a lot: that a smart contract can be the venue; that an AMM’s continuous, auditable, on-chain transparency can substitute for—not merely coexist with—pieces of the Regulation NMS apparatus; that self-custody, around-the-clock trading, fractional shares, and near-instantaneous settlement are benefits worth writing an exemption to support; and that liquidity provision into a pool is presumptively trading rather than dealing. That last point, in particular, is a conceptual win that reaches well beyond this order.

More to the point for anyone in the private-markets side of this business: the Commission has explicitly put expansion on the table. Comment question 4 asks, in so many words, whether the TSV Exemption “should be modified to permit a TSV to trade securities other than Tokenized NMS Stock,” and if so, which types. That is not a throw-away. It is the Commission telling the market where the next expansion could be, and inviting it. Question 2 asks whether the relief should be made permanent.

It is, to be sure, a bit deflating for the rest of the security token world that this order does nothing for them directly, seemingly opening the barn door to the large, established players to run out and occupy the field first. But the SEC starting with the most liquid, most disclosed, most surveilled securities in the market is a rational, stepwise rollout strategy. NMS stock is the “easy case” in many ways: there is a definitive public price to reference, a listing exchange to halt in coordination with, and an Exchange Act reporting regime already supplying the underlying disclosure. If the market can “prove the plumbing” there and generate a few years of transaction data the Commission can examine to gain trust, the argument for extending some version of this to security tokens generally gets a great deal easier to make. The harder questions for private securities—who does the transfer-agent function (is it even needed?), what substitutes for a listing exchange halt, what disclosure baseline applies—are more like engineering questions now, rather than regulatory “blockers.”

What to Do Next

If you are building anything in this space: read the Notice requirements in Section III of the order before you read anything else, because that thirty-item disclosure schedule is the actual compliance burden, and it will shape your architecture more than the exemption itself will.

If you are an issuer of a listed security: someone at your company should decide, in advance and on purpose, what you do when an Issuer Notice shows up. You will have 30 days, and doing nothing is a decision.

And if you are on the digital assets startup or general private-markets side, watching this and feeling left out—comment! File Number 4-927, open on the Commission’s comment page, and question 4 is addressed to you specifically. This SEC has proven that it is listening.

And of course, if you have questions regarding any of the above, or want to discuss your plans with digital assets legal counsel, reach out to us for a chat.

This article is commentary, not legal advice.

January 15, 2020January 15, 2020

DFS Crypto “Coin Listing” Proposal Represents A Dramatic Expansion of the NY BitLicense

The comments below are in response to the New York DFS’s new proposed Coin Listing Policy Framework (the “Proposal” or the “Framework”) extension to the DFS Part 200 (the “BitLicense”) regulation, released on 12/11/2019 (available here. The DFS has provided only until January 27, 2020 to get comments in to innovation@dfs.ny.gov, so please read the Proposal and this post, and send them your thoughts ASAP). The proposal consists, in main, of two prongs:

A provision for DFS “listed” coins which will automatically be permitted to be used by BitLicense grantees (“Licensees”).
A provision for self-certification of coins by Licensees which aren’t permitted under prong 1.

Little detail has been provided at this point, so the below comments reflect on the apparent main concepts of the Proposal, as well as interpret its general contextual and explanatory language.

As a reminder, the scope of the BitLicense is coverage only of those engaged in a “virtual currency customer business,” and so, the Proposal would apparently not effect either (a) non-business or (b) non-customer uses of cryptocurrencies (however, it’s worth noting that both limiting concepts could use more clarity in the context of the BitLicense).

Issues with The First Prong.

The first (and main) prong of the Proposal uses the foundational language “list of all coins that are permitted for the Virtual Currency Business Activities of the VC licensees, without the prior approval of DFS.”

However, neither the BitLicense regulation itself nor the language of the Proposal makes it clear whether it will be permitted to utilize coins which aren’t expressly approved by the DFS (or aren’t approved under Prong 2: self-certification). The alternative interpretation would be that of a “safe habor”: i.e., under which a Licensee could make use of non-approved coins in business, but would potentially receive less regulatory deference for them (or face some statutory limits under the safe harbor; e.g., limits in manner of use, type of customer, or scale).

My belief is that, on the wording of the Proposal, the DFS does intend to entirely prohibit dealings by Licensees in coins not approved under Prong 1 or Prong 2, rather than to create a new safe harbor.

If true, this would be striking, because it would represent a whole new dimension of the BitLicense: a ban on individual (non-approved) coins. This requirement (which seems material to the BitLicense as a whole) is not spelled out in Part 200, nor, even, in the language of the BitLicense application materials (i.e., the language of the forms – which may typically go beyond the letter of the law, albeit, in a less-binding and more guidance-like capacity).

It appears, then, that ad hoc interactions between Licensees and the DFS regarding permissiveness of activities with respect to specific coins (by understandably-cautious regulated crypto financial companies) has been taken “to the next level” in a regulatory sense with this proposal.

The confusion is compounded by the use of the term “listing” in almost every place in the Proposal –except the one sentence quoted above, which seems to contemplate any type of virtual currency business activity. The BitLicense itself does not define “listing”. Thus, it is not clear if the Proposal is intended to encompass public listing activities of Licensees (i.e., by exchanges, such as Coinbase), or any dealings in coins (e.g., private custodial holdings, private trading, payment processing, participating in a “utility token” ecosystem, etc.).

I believe this apparent quantum leap in the scope of the BitLicense deserves more public attention and scrutiny than it has thus far received.

To illustrate the impact of the regulatory shift, imagine you are a well-meaning crypto project starting up outside the U.S. — let’s say, Estonia. You “do everything right” in terms of your project team, governance, and financing — and may explicitly follow applicable cryptocurrency or other regulations in your home country of Estonia, as well as potentially on cryptocurrency exchanges in other countries (which may themselves be licensed and have an explicit regulatory status — e.g., as Gibraltar provides). You may even have what is on it’s face a “security token” – or choose to treat your coin as such, for regulatory certainty.

However, none of that “good citizenship” will result in your coin being listable – or perhaps even commercially-usable (i.e., in a custodial arrangement) by New York BitLicense holders. This will simply not be possible unless your coin or token is explicitly permitted under the Proposal – either under Prong 1 (DFS listing), or more likely, Prong 2: Licensee self-certification of the coin.

And despite the availability of Prong 2, getting certified under it is one-off process, company by company (discussed further in the next section). There are not a lot of parallels to this situation. It would be as if every non-public stock had to be re-certified by every broker-dealer or exchange that wished to deal in it – and mind you, many of these crypto tokens will be regulatory securities, just like stocks. This new Proposal, then, would represent a redundant layer of regulation for such instruments.

As for mainly “unit of exchange” crypto coins, these are more like currencies in view of the forex sector (which counts as its participants banks, speculative trading houses, and forex brokers). Yet, none of the regulated players in the forex space are required to get approval for every single currency they deal in.

Note that, in both the cases of stocks and foreign currencies, the traded instruments may very well “implode”, despite all assurances, and best hopes. They also might suffer from varying levels of money laundering risk (something explicitly cited as a review factor in the Proposal with respect to crypto coins). But one of the core functions of the market is to “price risk” with respect to all manner of bad outcomes, including that fraud, insolvency, or some other form of risk (i.e., cybersecurity) might lurk within an instrument.

Thus, it is far from clear that a more restrictive, crypto coin-specific regime is appropriate – and such might even hinder the market in its risk-pricing function (which is also a risk-surfacing and mitigating function).

RECOMMENDATIONS:

Clarify the permissiveness of non-approved coins under the BitLicense (under either prong of the Proposal)
Create (or clarify) a safe harbor for one or both prongs (preferably covering both).
Clarify whether the coin use restriction is with respective to public trading listings, or any “virtual currency business” use of a coin.
Limit the coin use restriction to public trading listings, or at least, tailor the safe harbor in a manner respecting “public vs. private” use (one might follow securities exemptions/safe harbors in this respect – and for similar reasons).
Clarify which factors would trigger the DFS to even review a coin for the general list in the first place, and if under consideration, what the criteria would be (presumably, all the company self-certification criteria, plus some additional ones).
Exempt coins which are securities in entirety (with a foreign reciprocation regime).
Exempt coins which have any regulated status under any qualifying foreign recognized regulatory regime.
Require the DFS to consider coins for listing by any paying applicant, fully subject to administrative and judicial review (just as with the BitLicense itself).

Second Prong Issues

The second set of issues I see is with Prong 2 in specific. This is the self-certification provision. The DFS has suggested numerous factors to be examined in a self-certification framework. Though the factors mentioned are not definitive, at least the DFS plans to release a “model” framework, and certainly, having this means of coin approval at all somewhat counterbalances the “bottleneck” that would exist if requiring DFS approval for every single coin. We can naturally expect that this will be the go-to provision for newer coins that haven’t yet garnered universal attention or acceptance, and therefore would not be under consideration for general listing under Prong 1.

However, the effectiveness of this prong seems limited by its “one-off” status. I.e., a Licensee that self-certifies a coin hasn’t done anything to make that coin usable by any other Licensee. So, each Licensee will have to “reinvent the wheel” in onboarding a new coin.

Or, alternatively, the onus will be on the progenitor of the coin to advocate for its self-certification by individual New York Licensees. It’s not clear why our Estonian (or any other foreign token-issuing) venture should have to be this concerned with individual companies in New York — particularly if they have followed all local regulations and those of major crypto-coin trading venues. In a sense, it’s a sort of “non-fungibility” rule for crypto assets that (almost by definition) doesn’t really exist in the broader financial sector — or in a free market property system, for that matter (imagine, e.g., pawn brokers not only having to themselves be licensed, but being required to “certify” every single type of asset they took in).

From the perspective of our Estonian applicant, it’s probably not worth the effort to shepherd their coin through possibly dozens of prospective Licensees. This will provide a competitive disadvantage to smaller or upstart projects, which will inevitably make New York less competitive.

RECOMMENDATIONS:

Make the Prong 2 prohibition a safe harbor (again).
Allow self-regulatory organizations to approve coins (this will presumably require some approval process in turn for the SRO – however, crypto SROs are indeed now in existence, such as the Association for Digital Asset Markets, or ADAM).

III. General Issues and Comments

Non-licensees who can still deal in crypto without a BitLicense under the DFS regulation; e.g., banks. Apparently, these entities will have a unique advantage under this regime, as it appears they will not have to get coin-specific certifications.

RECOMMENDATION: Clarify this (and preferably, do not establish this kind of differential treatment).
Regulatory Phase-ins. The BitLicense generally has no initial coverage threshold or “phase-in,” i.e., for small businesses or startups. I view this as one of the most damaging shortcomings of the BitLicense broadly (and know of numerous clients and prospects who have avoided or pulled out of New York entirely because of it). This has clearly created a preference for larger companies to deal in crypto in New York, and dramatically limited the choices of New York consumers and business. Now, with coin-specific qualification, the lack of BitLicense phase-ins will be even more damaging.

RECOMMENDATION: Allow businesses – subject to reasonable phase-in parameters (i.e., such as number of customers or revenue) – to be excluded from the BitLicense entirely, or subject to a general safe harbor. Coincidentally, one doesn’t need to look far to find reasonably-tailored regulation in this sense effectively covering crypto companies in New York: the New York SHIELD privacy and data security law, which goes into effect in 2020 (indeed, most privacy and data security laws in the U.S. and worldwide phase-in thusly, so they don’t apply from dollar (or customer) number 1, and which would badly squelch commerce and innovation. And arguably, crypto should have even more generous phase-ins, as most crypto clients make an affirmative choice and “know what they are getting themselves into” — unlike consumers generally using digital services).

CONCLUSION

I am a big fan of the increased securing and professionalization of the crypto sector, of which government regulation is a major (though not the only) part. However, the Proposal, and the BitLicense generally, could use significant fine-tuning to make it more friendly to innovation, including small businesses and startups. Until this is done, I believe New York is missing out on playing a larger and more constructive role in this important new sector, and this new coin-permitting Proposal (as initially-posed) will make the situation worse rather than better.

November 18, 2019November 18, 2019

A Tale of Two Token Offerings: Lessons from Blockstack (Reg A+) And Telegram (Reg D)

(*) Some of the biggest news of the past half-year on the US crypto regulatory front has been (1) Blockstack’s successful (qualified) “Reg A+” filing with the SEC and associated offering, and (2) the SEC’s lawsuit and injunction against Telegram, blocking distribution of their “Grams” tokens, sold pursuant to earlier “SAFTs” (Simple Agreements for Future Tokens, similar to SAFE notes). Surprisingly, the latter came even though Telegram had filed a Form D for ostensibly-exempt private, accredited investor-only sales of the Grams/SAFTs under Regulation D, Rule 506(c).

It seems to me that neither event — let alone comparative lessons of the two — has been fully appreciated by the crypto community. Thus, in this post, I wanted to highlight some main points of interest in each, and possible lessons in comparing and contrasting the two cases.

I. OVERVIEW OF “REG A+” AND BLOCKSTACK’S OFFERING

Blockstack was (in the US) a Regulation A (so-called “Reg A+”, since being expanded with the 2012 JOBS Act reforms) offering in the US which was qualified (“approved”) by the SEC on July 10, 2019 (see the offering circular here; filing index here). Reg A+ allows for up to $50 million to be raised by an issuer per 12 months, not limited to accredited investors, in exchange for following somewhat scaled-back public company-like disclosures (thus, it is often called a “mini-IPO”).

In fact, a Reg A+ offering is, for most purposes, considered “registered” by the SEC (which will become key later in this post). This is in contrast to offering exemptions, like the popular “private offering” (accredited investor-only) through Regulation D – Rule 506(c) offering. Such exempt offerings are expressly not “registered”, and therefore, every subsequent transaction (i.e., resale) of the issued securities are presumed unlawful in the US, lacking any further exemption (or, simply, a registration, as in an IPO or Reg A+ filing).

This “all subsequent transactions presumed illegal” status is of course a heavy cross to bear, and many, many blockchain token issuers over the past few years (actual, and would-be; ICO and otherwise) have expended considerable resources (and incurred considerable brain damage) attempting to deal with this situation, and square it with their structure and plans (our clients, of course, have at least had some of their pain mitigated, and many have — in spite of the lack of bespoke regulations — had successful token raises).

Critically, this consideration has been front-and-center even for ostensible “utility token”-selling projects, because (1) “pre-sales” of utility tokens, or rights to them, prior to developing the promised network utility, are statutory sales of securities in the US under the Howey “investment contract” doctrine, and (2) even when network utility is created, it is almost never 100% clear if “sufficient utility” — not only in an absolute sense, but also relative to subjective purchaser (and SEC) expectations — has been established to mitigate any possibility of being deemed a security.

Add on top of that the fluid nature of blockchains and their coins/tokens globally, and the result is that a heck of a lot more ventures are worrying about US securities law than either their globally-facing posture or the nature of their blockchain tokens and networks might suggest.

Thus, a major blockchain token issuer that could “safely” permit general public token purchases and sales in the US (including resales) while still offering what is effectively a “utility token” would be a major breakthrough.

Enter Blockstack. They were the first Reg A+ blockchain token offering of any kind to get approved by the SEC, and, quite fascinatingly, this was for a de facto utility token — not a security token, as nearly all observers had expected for the first approved Reg A+ project. A security token would have been the “safe bet”. But Blockstack (by all appearances) apparently really believed in the underlying model they had originally-envisioned, centered around the utility of their “Stacks” token, and its free-flowing role as critical to their network and constituent ecosystem — so they pushed to maintain their offering notwithstanding the token not really resembling a classical “security” on its fundamentals.

Now, I say “de facto” utility token because, what a Reg A+ offering (as with any securities exemption or registration) is expressly for is a security instrument. Thus, technically, what Blockstack has done is file as a provisional security (in a “mini-IPO”), while fully-disclosing their plans to foster an evolution of the token to a pure “utility status” — at some indeterminate point in the future (implicitly, to the satisfaction of the SEC). Their pathway to do doing such is moving the network to a “sufficiently decentralized” status. (As far as a specific threshold condition, we don’t really know what “sufficiently decentralized” means in the SEC’s eyes in any precision yet — but Blockstack could very well be the first case wherein we find out. On a related note, we’ve also argued here that being “sufficiently decentralized” shouldn’t be the only way for a blockchain token to become a non-security).

This indeterminate timing of the expected utility token status plus provisional treatment of the token as a security in the US is likely pretty important to the SEC’s approval of the offering. Basically, Blockstack didn’t design their offering like a “ticking time bomb” — i.e., one which is (presumptively) a security now, but will “explode” at some specific point in the future (that is, explicitly circulate contrary to securities regulations) — leaving the lawful securities trade status of potentially millions of (US) transactions in question.

When (and if) the Stacks token is ever deemed a non-security in the US, there will have already been a legal general public trading market for it in the US — as that is precisely what Reg A+ establishes. In my read, this is the central concern of the SEC, much less so than whether the securities trading market infrastructure and associated panoply of compliance becomes redundant at some point in the future (because the token “is suddenly a utility token”).

Don’t get me wrong; it’s not as if Blockstack took a “no-brainer” option in undertaking a blockchain token offering this way — by their own recounting, they spent $5 million in legal and professional fees on getting this offering through (plus a 9-month review timeline — which likely doesn’t account for pre-filing lead-time during which internal discussions, legal and accounting advisory consultations, and informal interactions with the SEC were surely taking place). (For comparison, $1-2 million for a traditional IPO is typical, so this was not “cheap” by virtually any standard).

But it was still a watershed accomplishment, and it will likely dramatically lower the cost for subsequent Reg A+ blockchain token offerings (and simpler, plain-vanilla security token offerings, or STOs, will likely be even cheaper than offerings hewing closer to the Blockstack “model”).

Also, the offering did raise $23 million under Reg A+ (i.e., in the US), so it did “pay for itself”, and thus, was “rewarded” in the marketplace. (Further, Crunchbase reports Blockstack raised a total of $93.8 million in 10 rounds, at least some of which was likely from Regulation S “offshore” sales, and so would not be counted along with the Reg A+ raised amount).

II. OVERVIEW OF TELEGRAM’S OFFERING AND SEC ENFORCEMENT

Telegram, the popular messaging app, went another direction with their blockchain token offering. They did go to market well after the SEC’s July 2017 “DAO Report” (essentially warning the ICO sector that it was presumed-regulated, and that enforcement was coming). And like many projects, Telegram responded by going the path of performing their “pre-sale” of tokens (that is, their sale of presumptive utility tokens — but before the network and companion utility was developed) within the US in a manner meant to mollify the SEC, by (1) limiting the sales to accredited investors, (2) filing a Form D declaration pursuant to Regulation D Rule 506(c), and (3) requiring US purchasers (and to some extent, offshore purchasers) to agree to contractual resale restrictions and lock-ups for an initial period.

After this initial phase — specifically, upon a hard deadline of October 31, 2019 (if not postponed under certain conditions), Telegram was to deliver its “grams” tokens to all pre-sale investors and the general public, worldwide.

(A general note: Telegram — thanks to Regulation S of the Securities Act — was not generally restricted in pre-selling such token interests to non-US persons — and itself enjoys somewhat-limited SEC jurisdictional reach, given its status as a non-US company. But in many ways, it clearly entered into US SEC jurisdiction. I’ll touch on jurisdictional considerations again below).

By hopes, and at first-blush appearances, this plan was expected to insulate Telegram from charges of violating securities laws in the US with its pre-sale agreements — in particular, with respect to US purchasers of the SAFT interests (all of whom were limited to being accredited). But as you probably can guess if you’re aware of the SEC’s lawsuit and injunction against Telegram of DATE, things did not go quite as planned.

The SEC took extraordinary action against Telegram with its suit filed on October 11, 2019 (complaint here ; cited as “Complaint” hereunder), seeking a TRO to completely enjoin (halt) Telegram’s distribution of Grams tokens worldwide until the merits of the offering were adjudicated.

(As a point of procedural detail, the court technically never granted the SEC’s requested TRO; on October 21 , Telegram and the SEC agreed to a stipulation and consent order that Telegram would voluntarily not “not offer, sell, deliver, or distribute ‘Grams’ to any person or entity” until the conclusion of a Feb. 18 & 19 2020 court hearing in the case. I think it’s safe to assume that the SEC would have obtained the TRO even if it relied upon the unilateral power of the court — but perhaps not in time for the October 31st planned Grams distribution date. Telegram’s SAFT purchasers also agreed to voluntarily postpone the distribution of Grams until after this hearing — sidestepping both questions of whom, if anyone, could still receive Grams, as well as whether the postponement could be unilaterally invoked by Telegram.)

(Please note that in all of the below, I am relying upon the SEC’s complaint for a recounting of the facts; which may not precisely hold. Telegram has not yet filed a full answer which might dispute some material facts. However, if even most of the facts are accurate, I believe the analysis and comments below are still on-point).

The SEC’s suit, at its core, is based upon two key concerns, which (in my own terms) boil down to:

the Grams token has virtually no way to be a full “utility token” by the October 31, 2019 delivery deadline, relative to how Grams was promoted and the offering was conducted (and probably also in any absolute sense; i.e., of meeting some basic threshold of utility); and
Telegram promoted and positioned the offering in such a way as to encourage — if not effectively guarantee — that many purchasers would act as mere “underwriters” for the initial offering; i.e., quickly “flipping” the tokens for a transnational profit, rather than as an investment in the inherent value of the token.

Addressing the first, and (I’d say) threshold concern: Telegram seems to have badly fumbled in making a strong “utility token” case, in both their communications and actual steps taken. This left them “wide open” to the SEC’s charges. See, e.g.,:

“Grams are not a currency because they have no realistic currency uses at this time” (Complaint, p. 14);
“Telegram sold and will deliver Grams in amounts that far exceed any anticipated ‘use’ on the TON Blockchain. For example, all but three of the United States Grams Initial Purchasers bought more than 2.5 million Grams each. Nor did or will Telegram restrict sales only to individuals who would actually “use” Grams (Complaint, p. 14);
“The Whitepaper .. contained a detailed list of projects and steps that Telegram and its principals would take to make TON a reality. This included describing at length Telegram’s plans for the TON Blockchain … [it] also described a long list of services that Telegram would develop to improve the functionality of Messenger and of the TON Blockchain after its launch, but that … Telegram had no reasonable prospect for completion in advance of the delivery of Grams.” (emphasis mine; Complaint, p. 18);
“The Whitepaper spoke of potential future products and services that investors could use in connection with Grams, but also made clear that these products were not available at the time the Offering began and would not be available by the time Defendants delivered Grams to Initial Purchasers.” (emphasis mine; Complaint, p. 24);
“Like other Offering Documents, the Primers made clear that that Telegram’s work would continue for some years after delivery of Grams on the new TON Blockchain and would remain critical for the foreseeable future. Both documents, for example, included a timeline specifying that the ‘[l]aunch of TON Services, TON Storage, and TON Proxy’ would occur in the year after the ‘[l]aunch of Telegram Wallet.’ The 2017 Primer explained that Telegram’s vision will not be ‘implemented and deployed’ until ‘2021,‘ and that even then ‘the continuous evolution of the TON Blockchain will be maintained by the TON Foundation.'” (emphasis mine, Complaint, p. 19; see also p. 24);

As we always reiterate around here, if you do one thing in pitching a utility token offering, don’t state that you won’t get the utility done by the time you distribute the tokens (at least, if its to, or within reach of US purchasers).

Also fairly damning, the SEC observed that far more money was raised than even Telegram itself claimed it needed to develop the blockchain per se, and indeed, Telegram was completely open about the fact that a very large portion of the money would go to other purposes, e.g.:

that Telegram would spend a large chunk of the raise on the core (non-blockchain) Messenger app which already exists: “… the $1.7 billion raised in the Offering so far exceeds what Defendants project they will need to develop the TON Blockchain… Defendants stated in offering documents … that Telegram would spend $520 million—or one-third of the funds raised—on Messenger alone between 2019 and 2021.” (Complaint, p. 14);
“The 2017 Primer described Telegram’s need for ‘about $620 million to support continuing organic user growth’ for Messenger … ” (Complaint, p. 16);
“The 2018 Primer similarly explained that Telegram intends ‘to use the proceeds raised from the offering for the development of the TON Blockchain, for the continued development and maintenance of Telegram Messenger, and for general corporate purposes.'” (Complaint, pp. 16-17)

This represents a significant tactical error, as funds not going to bringing about the initial core “utility” of the constructed blockchain network and token must inherently be a part of some long-term, generalized investment.

(For what it’s worth, I do not place great weight on many of the other “common enterprise” — as well as reliance upon “managerial and entrepreneurial efforts” — points made by the SEC; just because a venture is clearly a common enterprise per se managed by an inside team, it doesn’t mean that a token-purchaser is not purchasing for the sheer utility of that instrument. This, and related points, are discussed further in this post. But the damage is clearly done with the above complaint points, most based upon express admissions of Telegram itself.)

Even assuming Telegram hadn’t made any of the missteps discussed above, it would still have a problem with respect to delivering grams tokens in an unrestricted, global public offering. This would be based upon the reality that even if they assert the token was at the time of public delivery a utility token, any doubt as to such (especially in the mind of the SEC) would mean they are potentially unlawfully issuing a security publicly. And if such is done globally, that means the US general public could be included (and, giving the regulators the benefit of the doubt, therein harmed).

As the SEC put it : “Defendants have committed to flood the U.S. capital markets with billions of Grams by October 31, 2019 … without filing a registration statement for the Grams as they are required to do under the Securities Act of 1933… [selling] billions of securities that will quickly come to rest in the hands of U.S. investors” (Complaint, pp. 1-2).

This is where it becomes apparent that having an exempt US offering of securities, i.e., which is a one-time, non-public event — and/or ostensibly restricted to non-US purchasers — falls short of what is needed to properly enable US general public transactions (including resales).

III. COMPARATIVE DISCUSSION

Rule 144 under the Securities Act sets forth the holding period of “restricted securities” (most commonly, 1 year), and conditions for their permitted resales. Rule 144 dovetails with the all-important Section 5 general prohibition on unregulated securities sales, combined with Section 4‘s carve-out of “transactions by any person other than an issuer, underwriter, or dealer,” to create an avenue for allowable resales for un-registered, “private” issuance securities, as would presumptively be the case for the SAFTs sold by Telegram (and also, potentially, for the subsequently-distributed Grams tokens).

Further, after the 1 year restricted period, one would think these rules imply that restricted securities could trade freely in a “secondary market” (i.e., one consisting of resales, and resales of those resales, etc.) — and, ignoring for a moment individual US state/territorial securities laws, they can — in principle.

The biggest catch, however (which was roundly invoked in the enforcement against Telegram), is the “underwriter or dealer” part. If, in actuality, some of the private accredited purchasers (or the offshore purchasers) intend to re-sell their interests in grams to general-public US individuals, they are clearly falling outside the exemptions set up by Rule 144 and Section 4. Worse, because there is no benefit of the doubt (and no safe harbor) as to not being an underwriter, the burden of proof is on the issuer as to whether every single sale instance is not to a de facto underwriter. That means (1) it requires litigation (or exhaustive administrative back-and-forth) to prove this to the SEC, and (2) the only practical way to do so is to have procedural protections in place that make it impossible, or at least, vanishingly unlikely, for any purchaser to act as an “underwriter”.

This is where the SEC’s invocation of Telegram’s manner of sale is so devastating in its operation against them, especially that:

The lock-ups didn’t run the entire 1 year in any instance (“Round One purchasers agreed that they could not, without Telegram’s prior written consent, offer, sell, or contract to sell Grams that they purchased except in a series of 25% tranches starting three months, six months, twelve months, and eighteen months after they received Grams. Round Two Gram Purchase Agreements included no such restrictions”; Complaint, p. 14);
“Telegram also led the Initial Purchasers to expect profits by selling Grams to them at deep discounts from the price Telegram told them to expect on the day of launch, thereby encouraging those purchasers to immediately distribute Grams to the public… Under Telegram’s Formula, Defendants would price the first Gram at $0.10, and every subsequent Gram at an amount one-billionth higher than the prior sales price. As such, Telegram designed the price of Grams to increase ‘exponential[ly].’ Indeed, Telegram sold Grams to Initial Purchasers at a deep discount to an expected market price of $3.62 at launch.” (Complaint, p. 21);
On at least one instance of pitching to a prospective purchaser in early 2018, “Telegram spoke of the ‘chance for 0x-50x’ returns on the investments,” a prospect which was explicitly cited by the investor in agreeing to purchase $27.5 million worth of Grams “that had no use and would have no use at the time of launch, demonstrating its intent to profit from the potential increase in value of Grams.” (Complaint, p. 23);
“Telegram touted a readily available trading market for Grams, including one leveraging its hundreds of millions of Messenger users; sold Grams to Initial Purchasers at deeply discounted prices from its own projected secondary market price at launch; and promoted the future transferability of Grams into a liquid market” and”[Telegram] told investors to expect a listing of Grams ‘at the major cryptocurrency exchanges’ in ‘January – March 2019,’ immediately after the ‘December 2018 [p]rojected date for [Grams] to be issued to all investors,’ making Grams almost immediately sellable in open markets, including to United States investors…” (Complaint, pp. 19-20);
Many sales to offshore individuals lacked any meaningful tracking of the buyer’s identity, let alone their positioning with respect to the purchase; and grams trading activity was to be allowed — and indeed, promoted as being available on — offshore on run-of-the-mill cryptocurrency exchanges, complete with inadequate KYC of buyers (including, in some cases, not even blocking US individuals!) (see Complaint, p. 3, see also p. 28).

Even worse, the SEC argues (based in part upon the points above) that Telegram affirmatively launched the issuance as an underwriter issuance — in which case, purchasers subjectively not seeing themselves as underwriters is no defense! (I think, when the SEC cites Telegram’s secondary market listings and touts of such (as well as its hyping of resales), it is at its strongest in making this argument. But when it claims (as it does on page 26) that the Grams token cannot even become decentralized without underwriter-like resales, I think its case is on the weakest footing. Similarly, I am also skeptical when it argues that lock-ups are actually evidence of users’ desires to resell, as it does on page 14 — this seems a bit like “having it both ways”).

(And, for what it’s worth, I do not believe the SEC’s repeated complaints of Telegram’s having 170 million users at the outset — and even criticisms of Telegram observing such explicitly as driving “value” or “demand” — are particularly strong. One could just as easily argue that having such an established user base, scale, and experience of practice imply that the issuer is a mature business, and hence, token purchasers won’t need securities protections. Compare to how a contract for a new cloud service by Google or its peers is not treated like a security, even if the service is novel. Nevertheless, there were plenty of other defects, as discussed above).

In theory, all of the above issues would be nullified by the gram’s being, without a shadow of a doubt, a non-security, as of the planned release date of October 23, 2019. But with any doubt as to its being a pure “utility token”, the above issues compounded the damage for Telegram, and in effect, handed the SEC justification to call for a worldwide halt to the grams distribution — even though the SEC can generally only enforce with respect to securities activity within the US!

These defects render in stark relief the securities compliance pathway taken by Blockstack. With a Reg A+ filing, Blockstack nullified the temporal question of Stacks’ security status, while simultaneously “sterilizing” the US market with respect to all secondary market resales (whether originating within the US, or offshore — i.e., from run-of-the-mill cryptocurrency exchanges listing Stacks).

Having done a Reg A+ filing, secondary market resales of Stacks are simply allowed; explicitly, what is issued in the original sale are not considered “restricted securities”. As a result, the SEC (in my read) essentially doesn’t care whether the Stacks tokens trade on crypto exchanges overseas, because that is clearly not a public market in the US — and if US residents happen to be able to access these exchanges, that is no different than the same persons acquiring the tokens on the secondary market within the US (which, again, is allowed, under Reg A+).

The “catch” is that any organized, formal market-based trading of Stacks taking place in the US will have to be on a regulated securities exchange (at least, until such time as the SEC gives clear guidance that the Stacks token is no longer a security). No such exchange exists and carries Stacks as of this writing, so only informal trading is allowed in the US in the meantime. (A related, apparently-prophylactic practice I’m aware of, is that while Blockstack is indeed engaging professional crypto market-makers overseas, they are contractually-agreeing to terminate such relationships the moment a regulated securities exchange becomes available for Stacks tokens in the US. My guess is that this eliminates potential claims that the issuer is unlawfully “conditioning the market” for the subject security in the US).

IV. CONCLUSION

All in all, for the amounts of money we are looking at being at stake in these two offerings, Reg A+ seems to be an overwhelmingly attractive pathway to address the Securities Act as applied by the SEC to the issuance of a pre-network, but prospective utility blockchain token. While one can argue that the non-US company Telegram “shouldn’t have to care” about some obscure, untested (again, as applied) US regulatory election to their planned global blockchain token offering, the economics of the situation argues otherwise (particularly after initial funds were raised from US accredited and offshore investors to the tune of tens of millions of dollars).

Indeed, perhaps now that Blockstack has “blazed the way”, the SEC will work out a deal with Telegram that involves wrapping the (now-paused) Grams issuance in a Reg A+ offering (likely plus a fine).

Reg A+ as an affirmative “ICO” pathway aside, the cases of Telegram and Blockstack certainly have made vastly more apparent some important areas of SEC concern having to do with the “market-conditioning” aspects of global blockchain token offerings, as discussed above.

(* Article images courtesy of Wikimedia Commons; CC-by-SA 4.0. Links here and here).

July 23, 2018

House Financial Services – Monetary Policy and Trade Subcommittee Hearing (7/18/18): “The Future of Money: Digital Currency”

Below is a rough auto-transcript of a hearing held last week entitled “The Future of Money: Digital Currency” (video available at previous link).

The witnesses were:

Dr. Rodney J. Garratt, Maxwell C. and Mary Pellish Chair, Professor of Economics, University of California Santa Barbara
Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation
Dr. Eswar S. Prasad, Nandlal P. Tolani Senior Professor of Trade Policy, Cornell University
Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

We have not yet gone through the hearing record exhaustively and produced a selection of “pull quotes” of interest. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some. (Watch this space for further excerpts and comments, once we analyze the record fully).

TRANSCRIPT GUIDE AND ADVISORY:

The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab). Please use this functionality to confirm exactly what was said in each case.
The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning. They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.” You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with transcript follows:

July 23, 2018July 23, 2018

House Agricultural Committee Hearing (7/18/18): “Cryptocurrencies: Oversight of New Assets in the Digital Age”

Below is a rough auto-transcript of a hearing held last week entitled “Cryptocurrencies: Oversight of New Assets in the Digital Age” (video available at link).

The witnesses were:

Mr. Joshua Fairfield, William Donald Bain Family Professor of Law, Washington and Lee University School of Law, Staunton, VA
Ms. Amber Baldet, Co-Founder and CEO, Clovyr, New York, NY
Mr. Scott Kupor, Managing Partner, Andreessen Horowitz, Menlo Park, CA
Mr. Daniel Gorfine, Director, LabCFTC and Chief Innovation Officer, CFTC, Washington, DC
The Honorable Gary Gensler, Senior Lecturer, MIT Sloan School of Management, Brooklandville, MD
Mr. Lowell Ness, Managing Partner, Perkins Coie LLP, Palo Alto, CA

Here are a few “pull quotes” and exchanges of interest (this is by no means exhaustive):

- Rep. Soto (@1:42:08): “I’m more concerned though about being able to avoid money laundering for terrorism, drug trafficking, human trafficking, tax evasion — so I’d love to hear from each of you in one sentence on what we could do to stop money laundering and having Bitcoin and other cryptocurrencies be the choice of terrorists, drug traffickers, and those evading taxes.”
  
  Mr. Fairfield: “Trust FinCEN to do their job.”
  
  Ms. Baldet: “Rely on other law enforcement mechanisms that work around strong cryptography — we do not weaken roads to add potholes to them.”
  
  Mr. Kupor: “Bitcoin is actually the worst tool to money launderer because every transaction is registered and fully recordable so it’s actually law enforcement’s best friend”.
  
  Mr. Gorfine: “While the technology can be peer-to-peer, most activity takes place through a new type of intermediary where you can apply AML and KYC rules.”
  
  Mr. Gensler: “On top of that, rigorously require crypto exchanges to register — and you may need to pass a law to do that — but to make sure they register and that all the AML, anti-money laundering and know-your-customer is being done there.”
  
  Mr. Ness: “The alleged Russian hackers were caught because they used Bitcoin.”
- Rep. Faso (@1:45:01): “I’m wondering if for the benefit of our viewers at home across the country who are watching this hearing and are trying to understand the impact of the crypto currencies and what the future holds if if perhaps miss Baldet and Mr. Kupor could tell us where you think from a five to ten year view point where this is going to be the role that these currencies are going to have in our economy and how might this affect average consumers — right now it’s the market participants are mostly very sophisticated people do you see this insinuating itself into the broader economy?”
  
  Mr. Kupor: “Thank you yes so we believe that this really is gonna create a whole new set of of infrastructure on which all kinds of new applications are going to be built — some which we may not even know about today. So if you think about all the benefits we’ve reaped from you know Facebook and Google and all the kind of you know internet properties have been built today.”
  
  Rep. Faso: “… and negatives …”
  
  Mr. Kupor: “… and negatives — I think what the beauty of this technology is is it gives us a new set of platforms and again very critically those platforms are not controlled or governed by centralized corporations; they’re controlled and governed by community, and so you can imagine all the utility that we have today but where the consumer actually has ownership of data the consumer has the ability to actually ensure that data is shared in a manner in which they want to be shared and the consumer also can capture the economic rents from use of that data; so we think the opportunity in that respect is endless.”
- Rep. LaMalfa (@1:51:30): “Would you touch upon what what would look like if that token is determined to be a security?…”
  
  Mr. Ness: “Yeah I think the issue really comes down to friction and while we can get to a status of free trading securities by registering them, even when you do get to that status there are all sorts of ancillary friction[s] in and around the transfer of a security — you need to have broker dealers involved, and you need to have suitability requirements met and other potential disclosure issues and so forth that are ongoing; and so when we’re talking about trying to create the next generation of decentralized protocol layer kind of apps on top that are all interoperably-interacting with each other and transferring value at the speed of software to deliver a service to a consumer — it may it may be all transparent to the consumer that this is all happening under the hood –but you can’t have fundamentally the transfer of value at the speed of software if it’s a security.
  
  Rep. LaMalfa: “Please touch on the importance of increasing the access to the speediness of those types of trans transactions — why is that important?
  
  Mr. Ness: “Well I mean, to get a little philosophical I suppose I mean you know ledger technology is fundamental to Commerce, right, and double-entry accounting was an amazing innovation and ledger technology that, you know, pulled Europe out of the … Dark Ages, and the same thing can happen in in in a amazingly more robust way when we start to literally not just allow parties to trust each other through standard mechanisms of reconciliation, but when we remove the reconciliation or the need for it all together… and that is simply a philosophical point of view I suppose but it goes to this issue that we’re at early stages of this, we don’t know where it’s gonna, go but speed is probably a good thing.
  
  Mr. Gensler: “Could I just say I’m an optimist I agree with what mr. Ness says, but maybe it’s the MIT in me now, I think that the beneficial ownerships will be able to be tracked in a matter of milliseconds and nanoseconds — not yet, it might take five years — but we’ll get there; technology’s pretty neat how it grows and helps us.”
- Rep. Davis (@2:01:54): “I want to ask you a quick question sir; based on the way current law is written, it’s not cut and dry whether cryptocurrency should be regulated by the SEC or the CFTC. If Congress attempts to come up with a workable definition for cryptocurrencies that are more similar to commodities — you know call them as we’ve heard blockchain commodities — what should we be looking at to guide us?”
  
  Mr. Gorfine: “You know I the one thing I would say is that — and I mentioned this in my opening statement — that it’s important that we’re not hasty in terms of figuring out what the right contours are of applying… securities laws and then the the commodities framework. I do think that the SEC has in due course been providing additional clarity — there was recently Mr. Hinman over at the SEC, gave a well-received speech kind of outlining some of the SEC’s thinking as to how they would apply the securities law framework — and some of the things that I think you’ve heard are factors around decentralization, you know are their expectations of return based on meaningful work of others… Rhese are important elements that — of course are not you know I’m not saying that these are the only elements — but these are some of the things that you start to look at in terms of figuring out well when does it make sense to be applying the securities laws framework that includes things like required disclosures, it requires regulations around you know the offering of securities, and the intermediaries involved in securities, and when does that perhaps not fit the product. So I think that this discussion is ongoing, and I think that in due course, and being thoughtful you’re starting to see additional clarity and uncertainty coming out. But certainly those are some of the factors that we’ve we’ve heard talked about a fair amount.”
  …
  Ms. Baldet: “To tag on to kind of the last question but also the the concern about regulatory framework, you know what I was mentioning is about a need for clarity more so than the, not so much the bright lines that we’re talking about with security versus commodity, as much as more interest in safe harbors for innovators; especially because we’re seeing the market adapt to this in that new disruptors are at an advantage versus incumbent institutions who are waiting for regulatory clarity to engage. And so in a way, in the absence of that, it’s not it’s not necessarily that incumbents are incapable of innovating or they don’t understand the technology, but they have to take a sidelines approach because they have traditional businesses to lose.”
  …
  Rep. Davis: “Well thank you… We want to make sure that we devise a regulatory structure that allows this industry to continue to grow, but allows to us to address many of the law enforcement problems that have been brought up here by many of my colleagues — so I can’t wait to continue to work with you; thanks for your time.”

Again, we have not yet gone through the hearing record exhaustively. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some. (Watch this space for further excerpts and comments, once we analyze the record fully).

TRANSCRIPT GUIDE AND ADVISORY:

The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab). Please use this functionality to confirm exactly what was said in each case.
The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning. They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.” You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with full transcript follows:

June 21, 2018June 21, 2018

House Financial Services Subcommittee Hearing: Cryptocurrencies and Illicit Financing (6/20/18)

Below is a rough auto-transcript of a hearing held yesterday entitled “Illicit Use of Virtual Currency and the Law Enforcement Response”. The House Financial Services Subcommittee had officials from USCIS (ICE), FinCEN (Treasury) and the Secret Service on the stand, ostensibly to testify on the above-titled topic. However, due to the contemporaneous border family separation debacle, a large portion of the hearing was pre-empted by this issue, so virtual currencies did not get the full treatment originally expected. Nevertheless, the transcript with links to the hearing video is reproduced anyway, as it might be useful to some. (Watch this space for further excerpts and comments, once we analyze this record fully).

TRANSCRIPT GUIDE AND ADVISORY:

The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab). Please use this functionality to confirm exactly what was said in each case.
The hearing covers a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning. They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.” You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with transcript follows: