SEC Clarifies Stance Of Security Vs. Utility Tokens

As the debate around Cryptocurrency regulations unfold, a recent statement made by SEC’s Amy Starr provides some insight into whether these digital assets are considered securities or utilities. Speaking yesterday at a public meeting with 5 SEC Commissioners, Amy made a clear distinction to what the SEC currently identifies as a utility and security token:

“There’s a lot been said out there about using utility tokens. Words don’t matter in this case. The title doesn’t matter. We will look at what it is and if what it is satisfies the Howey test for an investment contract it’s a security. If you are buying something that you’re only going to use in an already existing platform then I would say hey that token is a use token which may not have the characteristics of the security. There’s a spectrum, and where you fall on the spectrum will depend on the facts and circumstances of what you have.”

This description is in line with the criteria that many in the industry have been using to distinguish utility and security tokens. 

However, the “spectrum” is a lot murkier than the SEC may understand. Currently, most blockchain companies issue tokens that can be classified as both a security and utility. These tokens are utilities because they have a function within their Blockchains ecosystem, but they are also being traded on the secondary market (for example, Filecoin, uses its token to pay for file storage space, while also offering it on certain exchanges for people to acquire as a speculative investment).

The dual use case of paying for storage space, and holding as a speculative investment is what presents a challenge to legally categorizing these cryptocurrencies.

When it comes down to it, people have the freedom to decide if they wish to treat the tokens they acquire as investment contracts or utilities, and perhaps that is the underlying problem. Based on Amy’s comments, it’s possible that a hard line may need to be drawn in order to distinguish these tokens despite their overlapping qualities.

This may lead to new regulations in the crypto space, where token holders must ‘use’ their tokens within the ecosystem a certain number of times a year, otherwise they would lose the right to hold them.

Although this may be counterproductive to a blockchain ecosystem expanding its reach and growing its community, such an enforcement might be the only way to satisfy the SEC’s definition of a “use token” versus an investment contract or security token.