SEC Chair Paul S. Atkins outlined the SEC’s approach to digital asset regulation through “Project Crypto,” emphasizing the need for common sense in the application of federal securities laws to crypto assets.
Token Taxonomy
The new framework would be characterized by a taxonomy that distinguishes among the following four principal categories:
- Digital Commodities: crypto assets will not be securities if they are intrinsically linked to, and derive value from, a programmatic operation on a functional and decentralized crypto system rather than from the expectation of profits from the managerial efforts of others;
- Digital Collectibles: crypto assets will not be securities if they are intended to be collected and/or used to represent artwork, music, in-game items, or digital references (e.g., internet memes, characters, trends);
- Digital Tools: crypto assets will not be securities if they serve practical functions, such as membership, credentials, or access rights; and
- Tokenized Securities: crypto assets will be securities if they represent ownership of traditional financial instruments maintained on a blockchain.
Chair Atkins reaffirmed that the Howey test will remain relevant in determining whether a crypto asset is a “security.” Importantly, he rejected the view that a crypto asset remains a security indefinitely. This appears to go back to the view expressed by William Hinman in his 2018 speech, Digital Asset Transactions: When Howey Met Gary (Plastic).
Support for Legislative Action
Chair Atkins expressed strong support for Congressional efforts to enact comprehensive crypto market structure legislation. Mr. Atkins closed by underscoring that the new framework does not signal a retreat from enforcement against fraud perpetrated via crypto assets; rather, it is a commitment to clear, knowable rules that respect the limits of the SEC’s authority and the economic realities of crypto assets.