There is no need to change the Securities Act of 1933
Almost every other Western regulator has updated their rulings for crypto, and although none is perfect, at least they have made changes and given cryptocurrency businesses and users some clarity and a chance to comply.
The leadership of Hong Kong, Switzerland, Singapore, the UAE, and Japan has been well documented. Recently, Japan’s ruling party has published a commendable white paper, Japan’s NFT Strategy for the Web 3.0 Era, as a calling for Japan’s leadership in Web3 and NFTs as the next frontier.
In a previous article, The SEC is Not Being Straight with the Industry, I exposed the many tools the SEC already has at its disposal, only if it wanted to enact updates.
The cryptocurrency industry isn’t asking the SEC to amend the Securities Act of 1933. That’s a tall order.
But the SEC could make some simple amendments to become more friendly to crypto and that could go a long way as a helpful move for an industry that is begging for it.
In line with the many tools already at their disposal, here’s what the SEC could do. The following is a 7-part regulatory update the SEC could easily implement if they had the will to.
First, publish a pre-approved list of tokens that would be allowed to trade in the US without being named securities. These could be curated from the top 100 tokens currently on CoinMarketCap representing the most credible projects with visible traction. The SEC could evaluate them based on their decentralization maturity aspects. Approximately fifty to one hundred such tokens would be expected to emerge from this list.
Second, grant a special license to at least five US Exchanges, and allow them to list the above-published set of approved tokens without naming them as securities. In one scoop, this would simultaneously neutralize those nebulous lawsuits against tokens or exchanges that were allegedly accusing them to violate Securities laws just because the SEC chose to conflate tokens with securities loosely. This license would also allow these exchanges to offer ancillary services such as loans, derivatives, staking, NFT listings, and other popular DeFi services. Along with this new license, the SEC could tuck in rules about broker-dealer status, custody requirements, KYC/AML reporting, and overall allowable risk-related aspects.
Third, label other tokens (up to the top five hundred potentially) as “small cap tokens”, and allow them to trade in a subcategory of services, similar to the Nasdaq’s small cap. Allow the above five exchanges to provide such services, and grant five additional crypto exchanges special licenses where these “crypto small cap” projects could trade within strict rules. All other lesser-known tokens would be relegated to overseas or offshore exchanges, therefore de-risking that segment for US consumers.
Fourth, require all token projects allowed to trade in the US to publish regular disclosures and adopt reporting practices comparable to those in place today for public companies, except for a handful of extremely decentralized tokens where a central team no longer influences, controls or manages the evolution of that project. Obviously, notable exemptions would be Bitcoin and Ethereum. Concurrently, work with the industry to develop such transparency standards and reporting requirements that would mix traditional data with the novelty of blockchain/crypto-related data (e.g. gas revenues, number of wallets, number of holders, on-chain transactions, etc.). This would squarely align with the SEC’s mandate of mitigating information dissymmetry by “enforcing practices that prohibit deceit, misrepresentations, and other fraud in the sale of securities”, except that the word “securities” is replaced by “digital assets.”
Fifth, allow Initial Coin Offerings (ICOs) but with restrictions for consumers. For example, the SEC could play it safe and only allow ICOs that have been first backed by VCs (VCs have higher selection thresholds than consumers). US citizens could be allowed to participate via capped amounts, based on their income levels, at the same terms as VCs. Tokens could be locked for a minimum of one year, and up to three years. All new token projects will have three years to qualify for listing in the small-cap or standard crypto Exchanges, depending on their maturity evolution. Otherwise, they would be relegated to offshore trading.
Sixth, allow banks to provide on-ramps and off-ramps to crypto exchanges in the US easily and openly. Start to unchoke the choking trend that is underway. By the same stroke, allow banks to hold up to 5% of their assets in cryptocurrency, as well as become certified custodians, and own or back USD-based stablecoins.
Seventh, continue to promote the use of KYC, AML, CFT (counter-terrorism financing) methods, and tax reporting obligations by all participants in the crypto ecosystems. Specifically, allow DeFi to prosper without impractical restrictions on self-custody wallets. Allow DAOs and not-for-profit crypto foundations to incorporate and provide clarity on their legal status. Declare NFTs as non-securities, because they are more like collectibles, and allow the mining industry to continue unharmed.
Of course, these seven actions are wishful thinking. The SEC and other US government agencies are already knee-deep in a search-and-destroy expedition. It is unlikely they will unwind their actions unless a strong US Congress edict comes their way.
What Congress can do will be the subject of the third and final installment in this series.