The Other Side of the SEC: Functionality and Decentralisation
Basic Background
Marco Santori is a lawyer who could be considered as one of the first cryptocurrency lawyers. He is the president and chief legal officer of Blockchain.com. Blockchain.com specialises in wallets. At present the wallet has capabilities for ether, bitcoin, and bitcoin cash. In the future there will be more altcoins added. You hold your private key to your blockchain wallet even though there is a password. This means you have to keep your private key safe and remember it. Blockchain.com is now expanding into creating a quality “institutional process”.
SAFT Project
Simple Agreement for Future Tokens (SAFT) was a contract that dealt with cryptocurrency launches in terms of securities. SAFT contract was reworked by Santori together with a team of lawyers who put the SAFT Project online to enable cryptocurrency ICOs and IPOs to use it. Santori says that his group made the already existing SAFT contract better. The SAFT project sets up a standard agreement for tokens in the “prefunctional” status. Prefunctional and funcitonal status of a token is a key indicator in determining the status of a token as a security.
“Prefunctional” and “Functional Status” for Token Categorisation
Before a token becomes functional, that is “prefunctional status”, it might have a certain status, either as a security token or not. Santori eloquently stated that, “Once it does what the creator said it should do, at that point that thing is really a consumer good. It’s a functional device, or a functional thing, like gold or bananas…”. In other words after a token becomes functional, that is “functional status”, a token’s status as a security might change. Therefore Santori holds that functionality is central in determining the security status of a cryptocurrency.
Challenge of Tokens for the SEC
He clarifies that the United Sates (US) Securities and Exchange Commision (SEC) does not completely agree that functionality is the single dividing line between a token being a security, and not being a security. In addition the SEC requires other elements. Basically, Santori says, that all the elements under the consideration of the SEC taken together add up to “how decentralised a token is”. In other words the SEC looks at a number of elements, one being functionality status, in order to determine whether a token is a security or not.
All securities in the US need to be registered and comply with the SEC. However, the SEC has not determined what defines a security vis-a-vis cryptocurrency. This is a fundamental problem and the reason why there is a lot of media hype around the SEC’s decisions on categorising cryptocurrency products as securities.
Token’s Day in Court
Santori’s opinion is that the status of a token as a security will probably not be decided by the SEC. Rather there are a number of major court cases that are pending and currently open against exchanges and other cryptocurrency companies that might actual write this definition for the SEC. Actually this sounds quite plausible because he explains that before a judgement can be made on these cases, the securities status of a token needs to be concluded. The only way to achieve this is for the court to decide whether the token is a security or not, so that it can be tried under the correct laws.
Summary
Whether a cryptocurrency is a security or not is a very critical question. This is because there are specific laws that securities have to abide by and all securities in the US are required to register and comply with the SEC. Functionality might be thought of as 1 factor in determining whether a token, or cryptocurrency, is decentralised rather than whether it is a security or not. It seems that decentralisation, however, is the defining element of a security according to the SEC. Nothing can be determined about compliance with law without a clear definition of a when a cryptocurrency is a security and when it is not. This is why securities and the SEC rulings are such a big deal in the cryptocurrency world.
