SEC Clarifies That Not All Tokens Could Be Considered As Securities

SEC states that tokens distributed within a functioning network are not securities. This opinion was expressed by SEC Commissioner Hester PEIRCE, known for defending the possible existence of Bitcoin ETF last year. There was a transcript of the speech published on SEC’s official website, regarding the rules for tokens and their classification.

“When the tokens are not being sold as investment contracts, however, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities,”

— noted the Commissioner. She also refers to the Howey test as a tool for assessing and classifying a token. Howey test allows to determine whether an asset is a security, based on the following criteria:

• this is an investment;
• there is an expectation of profit from investments;
• money is invested in a common enterprise;
• any profit depends on a third party or a promoter effort.

If all four criteria are passed, the asset is considered as security.

SEC is still trying to understand and classify the complex and unpredictable world of cryptocurrencies. For many projects, recognizing token as security is, in fact, a death sentence due to the high costs and time it takes to obtain legal compliance. A statement like the one which is being made could mean the regulator is ready to re-consider tokens and loosen its grip soon.

Image courtesy of Wall Street Journal