SEC Commissioner: Tokens Sold for Use on Functioning Network 'Fall Outside' Definition of Securities

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By Landon Manning

During a recent speech to the University of Missouri School of Law, U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce described interpretations of financial regulations for crypto assets, including scenarios in which they would not be considered securities.

Per the full text of the speech posted online, Peirce made a personal judgement that may have broad implications over several prominent crypto assets: “When the tokens are not being sold as investment contracts, however, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.”

The particular definition of securities regulations have been a recurring thorn in the space’s side for several years. According to the 1946 “SEC v. Howey” case, which was tried before the U.S. Supreme Court, the form of a contract between parties can be irrelevant in determining whether or not an asset counts as a security. With this pretext, many crypto assets are considered beholden to strict financial regulations that apply to securities.

If, however, tokens sold for use in a functioning network do not fall under this umbrella, then that would mean several major players in the space have significantly fewer rules applying to them. For example, ETH and XRP would likely function on enough of a “functioning network” for Peirce’s definition, while the vast majority of ICOs would still fall under securities regulations.

Of course, Peirce is only one of five commissioners heading the SEC. She made sure to preface her speech with a standard disclaimer, in her own words, “The views I express today are my own and do not necessarily represent those of the Securities and Exchange Commission or my fellow Commissioners.”

Nevertheless, Peirce is not the only commissioner to show at least some sympathy toward the crypto industry. Commission Chairman Jay Clayton, for example, has recommended a balanced hand with regulations to ensure growth and investor security. He has personally shown a cautious attitude toward the creation of a Bitcoin exchange-traded fund, but nevertheless has been far from a hostile force against the expansion of crypto investment.

The public comments of one commissioner could forecast a great deal of the SEC’s future plans. If Peirce’s stance becomes part of the official policy of the regulator, then tokens without a functioning network could see themselves seriously hobbled while those that power some of the world’s most robust blockchains could not.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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