ANALYSIS: For Crypto Tokens, More Certainty—and More Disclosure

Blockchain and cryptocurrency industry participants often complain that the US lacks “regulatory certainty"; some companies cite it as a reason to move their business headquarters elsewhere. A key component of certainty is coming to digital assets, but not by Congress or the federal regulators. Yet.

There’s been noticeable activity surrounding global token disclosure standards this year. Although most of the action was abroad, the similarities between California’s and New York’s efforts are harbingers that other state and federal efforts next year will follow the same pattern.

Flurry of Activity

The past few months have seen new crypto token regulations handed down across the globe.

• The European Union’s Market in Crypto Assets (MiCA) Regulation entered into force in June, with a final consultation on Europe-wide regulations to be published early in 2024, and member state mandates taking effect in 2025.
• Hong Kong released new guidelines for virtual asset trading platform operators in June.
• Namibia passed its Virtual Assets Act in July, with regulations pending.
• This September, the New York Department of Financial Services (NYDFS) released proposed updates to its framework for token trading businesses to trade tokens and a changed framework for how it would put tokens on its “greenlist,” which allows use by a licensed virtual currency business without approval of the token as a new business line.
• Also in September, Dubai’s Virtual Assets Regulatory Authority released regulations on virtual asset activity.
• California Gov. Gavin Newsom signed the Digital Financial Assets Law in October, establishing a New York-like regulatory regime for crypto businesses.
• Also in October, the Australian Treasury released a consultation requesting comment on digital asset platform regulation including token listing standards.

New Rules Despite Legal Uncertainties

The question that often comes up regarding US regulatory certainty is whether a particular digital asset is a security requiring the full registration and reporting required of all securities. Legal classification as a security has been the chief point litigated in US enforcement and private actions—whether Ripple Labs’ XRP utility token, NBA Top Shot NFTs, or American CryptoFed DAO‘s governance and payment tokens.

Other jurisdictions currently have more comprehensive guidance as to when tokens aren’t governed by securities regulation. For example, MiCA provides guidance by which tokens are subject to its requirements and not European securities regulation.

Can we expect to reach certainty in the US about securities status via litigation? Probably not, as appellate decisions centering on this issue are not expected until much later in 2024 at the earliest. But even when there’s certainty for some tokens, there will always be fuzziness about newer tokens, especially NFTs, which may be used for a wider variety of transactions.

This focus on status as a security masks one of the key issues underlying the fight over securities status: the fact that, as the North American Securities Administrators Association pointed out in a 2018 bulletin, many tokens have been issued with little disclosure as to their underlying fundamentals. In the American CryptoFed DAO dispute, the decentralized autonomous organization (DAO) argued that providing financial information about the underlying project was irrelevant and unnecessary.

Formal Disclosures Are the Future

The debate over what is a security shouldn’t obscure the global consensus that’s building that, even if a token isn’t a security, issuing a token will require securities-like (or “securities-lite”) disclosures.

Without exception, jurisdictions issuing crypto regulations or proposals this year require either token creators to disclose information to an authority or exchanges handing digital assets to collect the same information that other jurisdictions would ask from token creators.

Wyoming, which allows but doesn’t require registration, adopted regulations in October requiring Wyoming-registered digital assets to provide information on the asset’s underlying technology and transfer restrictions.

The effect across jurisdictions is that, either upon the creation of the token or its listing on an exchange (which is the primary way most can purchase a new token), information about the token’s rights, technology, risks, and principals needs to be disclosed. The effects of these disclosures are similar to coercing tokens to some form of federal securities exemption; MiCA is probably more akin to Regulation A, and California closer to Regulation D, in terms of volume of disclosure, but the new rules avoid having to force non-securities instruments into a securities format, but the substance will remain the same.

Even in the Ripple litigation over securities, Ripple Labs Inc.‘s partial loss—where the judge found that the tech company needed to make a securities filing for its “institutional” token sales—mirrors this consensus. In the wake of Ripple, lawyers have advised token issuers to make Regulation D filings or other registered securities exemptions for new tokens.

Even if legislation like the Lummis-Gillibrand Responsible Financial Innovation Act passes, and places all non-securities tokens under Commodities Futures Trading Commission regulation, it’s likely that CFTC regulations promulgated under Section 403 of Lummis-Gillibrand will contain some measure of these disclosure requirements as an industry standard.

This is probably the death knell for (metaphorically) crafting a crypto token in one’s garage. It may also entrench existing market players, as there will be less regulatory friction to make blockchain services using NYDFS “greenlisted” tokens such as Bitcoin and Ether than there would be for something new.

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