The U.S. Securities and Exchange Commission’s (SEC) enforcement division has identified at least 68 blockchain tokens as securities, including bluechip tokens like Solana’s SOL and Cardano’s ADA. SEC Chair Gary Gensler has stated that almost all crypto tokens fall under his remit, with the exception of Bitcoin (BTC) and possibly Ether (ETH). This has left many crypto users wondering what they can do with a token labeled a security.
According to Drastic, the general counsel for compliance-friendly trading and rewards platform Bakkt, the classification of a token as a security affects the disclosures companies need to provide to prospective investors and the manner in which an asset can be offered. These restrictions could limit the type of platforms that can legally offer an asset, like registered broker-dealers, securities exchanges and other trading systems, and whether more than accredited investors can trade the tokens.
We don’t believe that classification drastically impacts the use cases for those tokens, D’Annunzio said. However, it matters whether companies like Robinhood, Coinbase and eToro want to provide access to a token and whether they can legally do so.
The SEC’s lawsuit against Ripple in 2020 is a good example of what could happen if a token is found to be a security. Most exchanges in the U.S. delisted the token, XRP, and it is now only available for trading on offshore exchanges and Kraken.
Crypto lawyer Gabriel Shapiro has argued that cryptocurrencies are essentially shares in collectively-owned (through token holders) and employee-run (miners or validators) not-for-profit corporations. A token is the closest one can come to acquiring equity in a network that is not owned by anyone, he wrote.
The SEC’s interpretation of the Howey Test, which is used to determine whether an asset is an investment contract, affects who can access a token, but not what they can do with it.