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Cabinet Commentary: The Securities Law Treatment of Utility Tokens

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

In a recent article, Cadwalader attorneys argue that the SEC should revisit the application of the securities regulations to the sale of utility tokens on blockchain networks.

The attorneys address two key questions as to the treatment of "utility tokens" for purposes of the securities laws:

  1. Is there a way for the creators of a blockchain network to fund the development of that network through the sale of utility tokens that can be either (i) used to obtain a service on the network or (ii) resold at a profit by the initial purchasers?
  2. At what point is a blockchain network sufficiently developed such that it is reasonable to believe that utility tokens for the network are being sold for their use value and not for their speculative or investment value and, thus, such tokens are clearly not "securities" for the purposes of the U.S. securities laws?

The attorneys contend that how the SEC (and ultimately the federal courts) answer these questions will determine benefits to be gained and losses to be suffered.

This is an excerpt from an article published on January 11, 2022. The article was authored by Steven Lofchie, John T. Moehringer, Mark Grider, Conor Almquist and Sebastian Souchet.

Commentary

Given the significance of blockchain networks and utility tokens in absolute size, and their potential significance to the 21st century global economy, it is time for the SEC to move past "like should be treated alike" and on to "one size does not fit all." Congress should consider providing any necessary direction. Such legislation might be very simple; something along the lines of the following:

Study - The SEC shall conduct a study to evaluate:

(1) the potential for modifying the application of the existing system of securities regulation in order to permit, subject to the imposition of such conditions as the SEC finds in the public interest, the sale by blockchain developers of utility tokens that may be either used on a blockchain network or resold for a profit, where the blockchain may use a portion of the sale price from the tokens to improve the functionality or adoption of the network;

(2) whether any such modification should impose limits on the persons that would be permitted purchasers of such tokens or, where such limits might be inappropriate (as in the case of blockchain networks intended to be used by retail consumers), limits on the amount that could be purchased;

(3) initial and periodic disclosures that would be required to be made by the blockchain network developers, including disclosures as to the network development and as to their qualifications and financial interests;

(4) limitations on the individuals who may be employed by a blockchain network developer for the purpose of excluding those who have a disciplinary history; and

(5) financial controls that could be imposed on the expenditures made by the blockchain network developers or reporting requirements with respect to such expenditures.

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