The SEC released its long-awaited crypto token guidelines Tuesday, leaving many in the industry underwhelmed.

The 13-page document was written by William Hinman, the SEC Director of Corporation Finance, who famously said that Bitcoin and Ethereum were most likely not securities, and Valerie Szczepanik, Senior Advisor of Digital Assets. The guidelines mainly detail how the Howey Test, a decades-old legal precedent, can be used to determine whether a token is a security or not

The Howey Test

The Howey test has three elements, and according to the SEC, the sale of tokens tend to satisfy the first two...

1. The Investment of Money

2. Common Enterprise

The third is where things get a bit hairy.

3. Reasonable Expectation of Profits Derived From Efforts of Other

With this element, Hinman and Szczepanik go into a lengthy definition of an “Active Participant” or “AP.”  In short, the SEC defines an AP as a “promoter, sponsor, or third party” that “provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts.” But, they didn’t stop there. The guidelines go on for pages, covering characteristics that could satisfy the third prong of the test. For example, those “limiting supply or ensuring scarcity” could be an AP.

The different scenarios left many scratching their heads, trying to make sense of how different tokens fit and don’t fit into the proposed definitions. The broad vagueness of the document was likely purposeful and did little to provide real clarity to existing token communities. As Katherine Wu put it, “Taken liberally, that definition could really impact and even hinder the process in which a token project/start-up can decentralize itself.”  

A Positive Step

Despite this, many see the framework as a step in the right direction. As the crypto market continues to grow, so does the need for a clear regulatory structure. The SEC’s acknowledgment of decentralized networks represents a positive shift happening amongst regulators. It’s also important to note that the guidelines were not legally binding and were created to serve as a reference point for those looking to develop digital tokens.


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