SEC Commissioner Hester Peirce has publicly announced her proposal for a safe harbor for cryptocurrency token sales within the United States.
Often referred to as “Crypto Mom”, Hester Peirce was first appointed to the U.S. Securities and Exchange Commission in early 2018 and has been a strong advocate for crypto ever since. And while this isn’t the first time that she has spoken up about creating a safe harbor for crypto, today’s announcement is the first formal attempt at creating the necessary framework for the project.
During the Commissioner’s speech at the Internation Blockchain Congress in Chicago, she outlined her proposal to allow for a 3-year grace period, where new startups can sell their initial cryptocurrency tokens, without them being considered as securities and applying to U.S. law.
Essentially, the new safe harbor would preempt current state securities laws, giving crypto projects enough time for their tokens to mature into a fully-decentralized cryptocurrency. With that being, companies will not, however, be protected from law enforcement actions due to any form of illegal activity.
The Long-Standing Debate on Crypto Securities
Ever since cryptocurrencies first hit global markets back in 2009, there has been a long-standing debate as to whether a company’s initial token offerings should be classified as securities, or whether they are sufficiently decentralized in order to escape the SEC’s jurisdiction.
According to Peirce, “The analysis of whether a token is offered or sold as security is not static and does not strictly inhere to the digital asset”.
Peirce’s proposal is based on the fact that while a token may initially fall into the category of security, the token may eventually mature into a fully decentralized cryptocurrency, where it no longer qualifies as a security.
Passing The Howey Test
According to FindLaw.com, the Howey Test is a test created by the SEC to determine whether or not a financial transaction qualifies as an “investment contract”. If so, then the transaction must be considered as a security and is subject to certain regulatory requirements.
In the past, the U.S. SEC has taken enforcement action against companies, such as Kik and Telegram, that created their own tokens and sold them to raise funds for the startups. One other example is that of Ether, which, according to William Hinman, the SEC’s Director of Corporation Finance, initially appeared as a security, but upon its maturity, no longer qualified as one.
If Commissioner Peirce’s proposal is adopted by the SEC, they will set out to create a strict framework, which will allow crypto-related projects to offer or sell tokens to raise funds, while also protecting the best interest of investors.
According to Peirce, “The safe harbor is also designed to protect token purchasers by requiring disclosures tailored to the needs of the purchasers and preserving the application of the anti-fraud provisions of the federal securities laws.”
Featured image courtesy of The Wall Street Journal