Reading the Security Tea Leaves
“The Chamber’s assistance to me and my staff regarding my letter to Chair Clayton was invaluable. I believe that this positive response from the SEC helps stakeholders in the blockchain industry and look forward to working with industry to ensure regulatory clarity in financial services.” – U.S. Rep. Ted Budd
Reading the Security Tea Leaves
Statements from SEC Chair Clayton Provide Needed Comfort
By Amy Davine Kim, Chief Policy Officer
Chair Clayton’s March 7, 2019, letter response to Congressman Ted Budd (R-NC) and a number of bipartisan co-signers is an important development into the SEC’s thinking. It represents a further step in the evolution of policy considerations that is driving decision making at the SEC.
As we know, in February of 2018 Chair Clayton testified before the Senate Committee on Banking, Housing, and Urban Affairs that “every ICO [he’s] seen is a security.” Then in June 2018, Director of Corporation Finance Bill Hinman acknowledged in his speech, Digital Asset Transactions: When Howey Met Gary (Plastic), that both bitcoin and ether are not securities, and that the characteristic of a token, from security to something else, may change over time. These statements do not constitute binding agency guidance. Nevertheless, they are extremely helpful in reading the SEC tea leaves.
Chair Clayton’s March response to a letter from Congressman Budd is a new, significant addition to those tea leaves. Now, the Chair himself formally recognized the following:
Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 speech. I agree that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework. (Emphasis added).
The mutability of the characteristics of a token is an important acknowledgment by the Chair of the SEC. It demonstrates a deepening understanding within the agency of the nuances of this industry and the digital assets of which it is comprised. From my questions to Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation, Associate Director of Corporation Finance, and head of the SEC’s FinHub, during our panel last week, it appears the Commission continues to work on guidance to reflect this understanding. (Guidance related to matters specific to custody of digital assets remains elusive.)
We’d like to commend Congressman Budd’s commitment to eliciting answers to these questions that have plagued our industry for some time now, and likely for some time to come. His leadership on blockchain technology is influencing the dialogue and moving the needle forward in getting regulatory clarity necessary for the private sector to develop and innovate. We were fortunate to be able to work with him and his colleagues to craft a letter that would obtain a helpful response for our members.
“The Chamber’s assistance to me and my staff regarding my letter to Chair Clayton was invaluable. I believe that this positive response from the SEC helps stakeholders in the blockchain industry and look forward to working with industry to ensure regulatory clarity in financial services.” – U.S. Rep. Ted Budd
On another matter of “security,” this one of national security, I’d like to call your attention to comments made by Counselor to the Secretary of the Treasury Craig Phillips at the DC Blockchain Summit last week. He said:
“the government is unlikely to be at all compromising and it’s again kind of a show stopper where you can have 99 things go great and if there’s really serious incident involving national security, terrorism, or money laundering. It becomes kind of a show stopper for the evolution [of digital assets].”
The term “show stopper” was used three times in his remarks. It is unclear whether he meant virtual currency in particular, blockchain in general, or specific companies. Typically, Treasury’s enforcement in this regard stems from the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC), which generally sanction specific persons, companies, governments, regions, and in some cases, vessels (ships). They typically do not seek to restrict technology. When entering that realm, regulators will regulate the activity regarding the technology, not the technology itself. These comments are concerning as it indicates a deeper conversation that must be addressed if Treasury is exploring its role in the oversight of this industry.