A Token Safe Harbor, Banking & Human Rights
Off the Blocks | Vol 101, February 11, 2020
|Feb 11|| 6|
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SEC Commissioner Peirce's Token Safe Harbor Proposal
Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network. In the course of building out the network, they need to get the tokens into the hands of other people. But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws. The fear of running afoul of the securities laws is real. Given the SEC’s enforcement activity in this area, these fears are not unfounded.
- SEC Commissioner Hester Peirce
Last week, Commissioner Hester Peirce shared some of her views on the regulatory environment for encouraging the development of blockchain and crypto. More specifically, she has proposed a framework that creates a safe harbor for token offerings. Such a proposed safe harbor would allow token issuers to issue tokens to the general public without the need to register as an issuer of securities.
The SEC has previously been cautious in its approach towards the issues that entrepreneurs face while jumpstarting and creating a tokenized and it is well aware that such an approach has stifled off innovation.
The SEC’s approach in these cases has made it extremely difficult for a company to distribute a token—a process that typically includes planning for a future in which people use the network and talking positively about its prospects for success—without running into a charge that the company is engaged in a securities offering. We have even hinted that a token airdrop in which tokens are given out freely might constitute an offering of securities. How is a person supposed to get a network up and running when she cannot even give away the tokens necessary to use the network?
This is a classic Catch 22 situation. Entrepreneurs cannot get a token out to build a network because they would run afoul of security regulations. However, without getting their tokens out, they cannot build a network that is decentralized enough that they don’t run afoul of the security regulations.
So in light of this, the safe harbor could be a welcome relief to jumpstart the tokenized economy. The safe harbor would provide “network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met.” However, as always, in order to take advantage of the safe harbor, issuers must comply with a set of 5 conditions:
The team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal.
The team would have to disclose key information on a freely accessible public website.
The token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network.
The team would have to undertake good faith and reasonable efforts to create liquidity for users.
The team would have to file a notice of reliance.
I think this is a great way forward. Lowering the compliance costs on the potential issuers, opens up the playing field. However, some of these objectives could potentially be addressed simply through modifications in Reg CF for example by increasing the threshold for the maximum amount of money entrepreneurs can raise.
One note of caution as the safe harbor may gain momentum is laid out in Commissioner Peirce’s comments as well:
By essentially buying time for this question to be answered, the safe harbor makes it much more likely that the question as to whether something is a security can be answered in the negative.
Hopefully, the answer to this complicated question does not amount to kicking the can down the road and dealing with more uncertainty 3 years down the line. There is a saying that it takes 7 years to build a company. An uncertain regulatory regimen for 3 years would give rise to ideas for short term profiteering and thwart real innovative ideas that undoubtedly require more time to gain market traction.
If you’d like to get a word into the conversation, reach out to Commissioned Peirce - she tweeted out her coordinates:
Now some significant news from the world this week:
Supply Chain | Mercedes-Benz taps blockchain to track emissions in cobalt supply chain: While EVs reduce carbon emissions, the production process of the vehicles, their batteries and the sources of the electricity used to power them have come under scrutiny for their negative impact on the environment. Mercedes-Benz launched a blockchain pilot targeted at general suppliers last year, focusing on certifying procurement and contractural compliance. Mercedes-Benz said it will work with suppliers to set emissions reduction goals and strategies, although it does not include specific numerical targets in the blockchain pilot or Ambition2039 announcements. [… Read More on Supply Chain Dive]
Banking | 40 German Banks Seek REgulator’s Green Light to Offer Bitcoin Custody: On the heels of new Anti-Money Laundering laws, several German banks are reported to be seeking regulators’ go-ahead to offer digital assets services. Local newspaper Handelsblatt reported on Feb. 7 that Germany’s Federal Financial Supervisory Authority (BaFin) is dealing with a cascade of applications from 40 banks seeking to become regulated cryptocurrency custodians. The new legislation covers the gamut of crypto assets — from cryptocurrencies to tokens — classifying them as digital representations of a value that do not have the status of legal tender. […Read More on CoinTelegraph]
Fintech | Citi, Goldman Sachs Conduct First Blockchain Equity Swap On Ethereum-Inspired Platform: On January 28, Citigroup and Goldman Sachs quietly conducted what some will consider a historic transaction: the first equity swap on a new blockchain built using tools originally designed for ethereum. While this first transaction, a total return swap in which one bank agreed to make a payment based on the returns of an underlying asset, and the other based on a set rate, involved only the two counterparties, another 13 are waiting in the rafters. Unlike more traditional equity swaps, which have to be constantly updated for countless variables, including end-of-day market prices, corporate actions like stock splits or dividend payments, and variable interest rates, the new equity swaps platform, powered by venture-backed blockchain startup Axoni’s technology, assures that every counterparty in every swap is seeing, and using, the same data. [… Read More on Forbes]
Tech | Telegram Drops Technical White Paper for Blockchain SEC Is Trying to Halt: Telegram, the messaging app company currently facing a legal fight with the U.S. Securities and Exchange Commission over its $1.7 billion token sale, revealed more details about the technical specifications underpinning its TON blockchain Wednesday. A new white paper details the block validation process for its blockchain, describing it as a Byzantine Fault Tolerant protocol custom-built for proof-of-stake networks. The company was sued by the SEC last year on allegations it sold unregistered securities during the pre-sale of its upcoming gram tokens, the native cryptocurrency for TON. However, this litigation does not appear to be halting any development on the TON platform. [… Read More on Coindesk]
Startups | Paystand Raises $20M to Be Blockchain-Based ‘Venmo’ for Commercial Payments: Paystand, a platform using blockchain technology to automate commercial payments, has raised $20 million in Series B funding. Paystand aims to makes complex commercial transactions and payments "as easy and fast for enterprises as Venmo has done for basic consumer-to-consumer transactions," according to a press release on Thursday. The firm's service is based on a blockchain network that it says provides "real-time, fund-verified" payments, allowing businesses to move money around instantly. Paystand says it digitizes and automates the payment lifecycle, from invoice to reconciliation, by integrating with client businesses' databases. [… Read More on Coindesk]
It’s a nightmarish scenario that is sadly familiar to many who are seeking work in foreign countries. Slavery and human trafficking — these are criminal industries that continue to flourish in many regions across the globe. Such problems may seem distant and abstract to the average consumer in more developed regions, but it’s a very real problem for millions of people. Many retail products can be traced back through supply chains, linking consumers to some of the 45 million people in 167 countries that are reportedly trapped in modern slavery. In cooperation with the United Nations-led International Organization for Migration (IOM), Diginex launched IRIS-SAFER to protect migrant workers in Hong Kong, with plans to expand to more regions. The most obvious example of worker abuse is the charging of expensive recruitment fees by unethical agencies. Workers may wind up paying fees in the thousands of dollars for the privilege of being hired. In many cases, these vulnerable workers must take out high-interest loans, which are issued by the agencies, in order to pay off the fees. [… Read More on CoinTelegraph]
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