- The SEC’s Corporation Finance Director William Hinman has suggested a regulatory framework for digital tokens based on the level of decentralization of the token network.
- A project should meet the standard for decentralization if it is more decentralized than the Bitcoin or Ethereum networks on June 14, 2018.
- Innovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership.
- The Blockchain Association urges the SEC and Congress to provide more regulatory certainly in line with this framework.
In order to realize the full potential of the token economy and all of the services it can offer, we need regulatory certainty for digital tokens. We must know when tokens qualify as securities and when they do not so that innovators know which regulatory regime applies. In 2018, the Securities and Exchange Commission (SEC) offered informal guidance on this topic in the form of enforcement activities, statements, and speeches.
The most important statement to date has come from William Hinman, director of the SEC’s Division of Corporation Finance, on June 14, 2018 in a now well-known speech at the Yahoo Finance All Markets Summit. The clearest and most important takeaway from this speech was that bitcoin and ether were not considered securities by the SEC as of that date. It did so because the factual record at the time demonstrated that the networks in which the two tokens function were “sufficiently decentralized.” Others have written extensively about the traditional Howey factors discussed in the Hinman speech, but the factors contributing to decentralization are less well understood.
Token projects can learn from the analysis Hinman applied to bitcoin and ether, with the key learning being quite simple: tokens from a network at least as decentralized as the Bitcoin and Ethereum networks were on June 14, 2018 are not securities. In this post we explore in detail the factual record and what qualities Bitcoin and Ethereum had on June 14, 2018 to understand more specifically what threshold is needed for a network to be “sufficiently decentralized.”