The approach to regulating crypto is ambiguous at the moment. Here are some fundamentals to understand how things are now and how it might change under the Biden Administration.
The Securities and Exchange Commission (SEC) is the agency tasked by Congress to maintain orderly and fair capital markets. The SEC has a Chairperson and 5 Commissioners appointed by the President. President Biden appointed Gary Gensler as SEC Chairperson. Gensler taught courses on digital currencies at Massachusetts Institute of Technology, making him at least knowledgeable about crypto and possibly able to clarify the path for how it will be regulated.
HOWEY TEST
If you were a student in my business law class, you would learn that one of the basic questions asked by securities regulation is whether something is a security or not. This is because if the thing is not a security, then the securities regulations do not apply and compliance with those regs is not necessary. A "test" was created by the US Supreme Court in the case of SEC v. Howey, Co. A "test" from the US Supreme Court provides a rubric that courts apply to future similar cases. The Howey test provides guidance for courts and the rest of us understand what is and is not a security.
Securities are an 1) investment of money, 2) in a common enterprise, 3) with the expectation of profit, 4) through the efforts of a third party. In Howey, purchasers of units in an orange grove were deemed to be purchasing securities because they were buying the managerial efforts of others along with their piece of the orange grove. The specific security involved was an investment contract.
SEC efforts to apply this simple test to token networks have not proven to be clear cut. The regulations do not fit crypto. Opting completely into securities regulation for crypto would require broker-dealers and exchanges to handle digital assets creating unique challenges. SEC Commissioner Hester Peirce proposed a Token Safe Harbor Proposal 2.0. The safe harbor provides network developers with a three-year grace period within which they facilitate participation in and the development of a decentralized network, exempted from the registration provisions of the federal securities laws.
REGISTRATION under the Securities Exchange Act of 1934
Exemption from registration is a very big deal as my biz law students can explain to you. Allowing networks to develop and grow without the administrative burden of form filing, SEC oversight, and information sharing that registration requires truly provides space for any industry - including crypto - to figure itself out and create value for investors/traders/crypto entreprenuers.
We all stay posted as to how the new SEC Chair may handle the proposed Token Safe Harbor Proposal and crypto in general.
