Last week, Securities and Exchange Commission (SEC)
commissioner Hester Peirce
released long-awaited 'safe harbor' proposals that set out
how the agency will regulate part of the crypto markets in the
The proposed safe harbor would give digital token projects
three years to demonstrate that the tokens they issue are not
securities, and therefore should not be subject to the SEC's
The hotly anticipated proposals were met with approval from
many in the crypto community. However, a week on, many
prominent names in the sector have had time to deep-dive into
Peirce's proposals and have now raised a range of concerns.
"Thinking more about Hester Peirce's proposal for a token
safe harbor, which really does advance the ball re US SEC
wrote Caitlin Long on Twitter, a Wyoming-based blockchain
expert, "there are issues that still need to be addressed
– the basic one is whether the tokens are presumed
securities during the safe harbor or not."
See also: The rise of token technology
The safe harbor
During a speech in Chicago last week, Peirce discussed
the problem at hand. Many crypto entrepreneurs are seeking to
build decentralised networks in which a token serves as a means
of exchange on, or provides access to, a function of the
network, she said.
"In the course of building out the network, they need to get
the tokens into the hands of other people. But these efforts
can be stymied by concerns that such efforts may fall within
the ambit of federal securities laws," adding, "the fear of
running afoul of the securities laws is real. Given the
SEC’s enforcement activity in this area, these
fears are not unfounded."
As it stands, entrepreneurs looking to issue tokens can be
hesitant to do so in fear of breaching the SEC's stringent
"We have created a
"We have created a regulatory catch-22," said Peirce.
"Would-be networks cannot get their tokens into
people’s hands because their tokens are
potentially subject to the securities laws. The laws cannot be
ignored, but neither can we, as securities regulators ignore
the conundrum our laws create."
It’s a case of investors causing issue for the
very entrepreneurs they are investing in. "Most folks buying
tokens when they are first available are not in fact
immediately acquiring them for a 'consumptive’
purpose," Lewis Cohen, co-founder at DLx Law,
wrote on Twitter. "They believe that, over time, the
related network will grow and they will be able to sell the
tokens for a profit."
But what of third parties who want to use the tokens for
their intended purpose, Cohen asked – and what about
exchanges that want to provide access to tokens?
"If adopted, the safe harbor proposal will address these
secondary sale transactions by persons not affiliated with the
initial development team," he said. "There is no policy reason
why such asset sales should comply with the securities
US fintech regulation: where do we stand?
Long, too, suggests the proposals are positive, but points
out some issues: "the proposal opens at least two cans of worms
– the custody question, and creates problems for
issuers outside the US,"
she wrote, adding that many countries recognise that tokens
aren’t necessarily securities, but if the US
thinks they are, then other countries may follow.
"This proposal moves the ball, but there’s
still a big catch-22 preventing the security token industry
from flourishing in the US. But, on the other hand, if the
tokens aren’t presumed securities during the
three-year grace period, then they’re property,"
In the US, individual states, not the SEC, have jurisdiction
over property – meaning the SEC would need to
cooperate with each state for the proposal to work.
"This matters a lot, because property and securities are
treated differently under commercial law (different
negotiability, different ways of perfecting security interest,
Others made similar points. "The first thing that struck me
was the tone/mission statement implied,"
wrote Drew Hinkes, counsel at Cartlon Fields. "This looks
like 'how do we make workable token sales that allow networks
to develop?' not 'how do we apply the securities laws to
issuers of instruments?' Is this a policy shift?"
In SAFT hands
Some commentators have questioned if the safe harbor
proposal is a ratification of the Simple Agreement for Future
Tokens (SAFT) framework. SAFT is an investment contract
offered by cryptocurrency developers to accredited investors,
which is considered a security and therefore is compliant with
They were first created to help new cryptocurrency
entrepreneurs raise money without breaching financial
regulations; specifically, the regulations that govern if the
investment is a security or not.
Some expected Peirce's safe harbor to be a formal
ratification or extension of the SAFT model. Others suggest it
"It is a dramatic new
approach to regulating token issuance ab initio"
"This is not an extension of the SAFT framework at all. It
is a dramatic new approach to regulating token issuance ab
initio. The SAFT framework looks downright conservative
next to this,"
wrote Marco Santori, president and chief legal officer of
digital asset platform Blockchain.com.
"For many, this proposal is far superior to the SAFT
framework. It exempts from the registration requirements not
only resales of tokens, but also primary issuance," he added.
"By and large, under the SAFT framework that became standard in
2017/18, primary issuance of tokens in the US could only be to
accredited investors. In contrast, this safe harbor proposal
permits initial sales to the public right out of the
gate…it gives retail the same early access as venture
According to Jeffrey Amico, counsel at tech venture capital
firm Andreessen Horowitz, if the safe harbor passes, "it would
not only be very positive news for new token launches, but also
for existing SAFTs that are sitting in regulatory limbo".
These points show that the proposals need work –
far from unusual for this type of regulatory change.
In her speech, Peirce suggested that her office would
be open to discussion.
"Hopefully, there is one point on which we can all agree: if
you are in this space, it is critical to understand the
arguments on both sides and to have an informed view on them,"
wrote Cohen. "The safe harbor proposal is the beginning of
an important dialogue on this topic."
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