The SEC is Paving the Way for a Decentralized Financial Future
Read the full public statement: SEC Commissioner Hester Peirce — Token Safe Harbor Proposal 2.0
On April 13th, SEC Commissioner Hester M. Peirce released the second version of her Token Safe Harbor proposal. This is an important step in socializing the regulatory changes required to adapt to the possibilities created by decentralized networks.
In many past discussions, we have highlighted that the major hurdle facing crypto today is uncertainty around regulation. I experience this first-hand with my work at Goldfinch Finance in our product design discussions.
The summary section of the proposal ends: “Now, as a new Chairman is coming into the SEC with a new agenda, is the perfect time for the Commission to consider afresh how our rules can be modified to accommodate this new technology in a responsible manner.” This is clearly a nod to Gary Gensler, (incoming SEC Chairman) who had a prior position as, of all things, a professor of Blockchain at MIT.
With the Coinbase IPO, institutionalization of Bitcoin, the emergence of a digital Yuan, and Mr. Gensler’s appointment, this feels like the right time for the SEC to make a move.
So what does this mean for blockchain and DeFi?
This can be summarized by two key highlights of the note’s appendix preliminary notes section.
First, Peirce makes it clear that she understands the importance of this proposal:
“[F]or a network to mature into a functional or decentralized network that is not dependent upon a single person or group to carry out the essential managerial or entrepreneurial efforts, the Tokens must be distributed to and freely tradeable by potential users, programmers, and participants in the network.”
The implications of this statement are critical — not only is the SEC implying that decentralization is useful, it is also acknowledging that a decentralized system would require tokens that are not regulated as securities, (or at least limited in their distribution as such.)
Peirce then goes on to describe the gist of what is being suggested:
“Accordingly, this safe harbor is intended to provide Initial Development Teams with a three-year time period within which they can facilitate participation in, and the continued development of, a functional or decentralized network, exempt from the registration provisions of the federal securities laws so long as certain conditions are met.”
Sounds great. What are the proposal details?
The appendix section of the proposal adds color — here are the main points:
- Tokens must have utility — for use to participate on, facilitate access to, or development of the network
- A public website must include disclosures, to be updated semi-annually — including source code, steps to independently access a network’s transaction history, and token economics (including items that would typically be part of a white paper, like token distribution model, consensus mechanism, and governance.) Other items are listed as well but none that appear untenable.
- A filing with SEC on reliance of the safe harbor.
- An exit report prepared by project’s counsel explaining that the network has achieved decentralization and therefore no longer requires the safe harbor and associated disclosures.
The current regulatory uncertainty casts a shadow on the space and creates a hurdle for integration with the rest of the financial ecosystem. If this proposal becomes a reality, the floodgates of development and progress in DeFi will truly be opened. We are optimistic that the US will continue to accommodate technological progress and look forward to further developments from the SEC.
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