The Securities and Exchange Commission's announcement on blockchain tokens has affirmed a common sense principle: laws do not stop at a computer keyboard. This isn't a great surprise.
The SEC ruled that DAO tokens (a decentralised autonomous organisation running on Ethereum which was hacked last year) did constitute a security under US law, but that no legal action would be taken in this case.
In an accompanying Investor Bulletin the regulator said initial coin offerings (ICOs) may come under inspection on a case by case basis, regarding whether they would count as securities and require registration with the SEC.
"Case by case basis" is legal speak for 95% of the time, tweeted Preston Byrne, CIO of Monax; someone who has been outspoken against token sales of every stripe.
Another outspoken (though slightly more lenient) lawyer on the subject of token sales is Stephen D. Palley, counsel in the Washington D.C. office of Anderson Kill.
Palley said of the DAO ruling: "It will be interesting to see how the SEC deals with recent large token sales directed to US residents by US residents. The analysis could certainly be coloured by the amount of personal gain its promoters receive.
"The SEC also reminds the industry that exchanges and their participants are subject to securities laws. There is no 'but it's blockchain' or 'it's a crypto-exchange' exemption in US Securities law."
There's probably a clear division between those who think ICOs should count as securities and those who don't. Palley wanted to be clear that he does not think all tokens are securities.
"It's not only possible - it's a fact that there are software tokens in existence that are not securities." He also pointed out that the definition of ICO tokens as securities could vary from one jurisdiction to the next – a point which seems to often be ignored.
"For somebody to flat out say that all tokens are securities, my question then would be, first of all, describe the token; second of all would be, where? Because I can't tell you what the laws in Lichtenstein or Laos or Liberia would say - I don't know. One of the challenges with tokens is they can be sold everywhere in the world all at once."
Another common approach is the distinction made between a utility token and what may be a pure investment token. "I don't think that's a bad sort of general rubric if you are talking about US securities laws," said Palley.
"The fact that it's called a token or the fact that you are doing a token sale, I'm not sure that in and of itself means that it's a securities offering.
"The problem is you have people who are taking ideas, creating a website in a day, maybe writing a white paper - maybe swiping a white paper from somebody - and baldly saying if you give us your money we will build something that you can later use.
"Without going into detailed analysis of securities laws, that basic proposition: give me your capital, over which you will have no control and I will build something that you may be able to later use, and I will give you something that you can trade on secondary markets ... in a lot of places that is probably going to be a security. Period."
To read the full article: There is no 'but it's blockchain' exemption in US Securities law