Are Tokens a Security?

When are blockchain tokens a security and when are they something other than a security? The crypto community was set abuzz when William Hinman, director of the Securities and Exchange Commision’s Division of Corporation Finance, delivered a speech on cryptocurrencies and offered additional detail on the SEC staff’s perspective on the securities law treatment of digital asset transactions.

Key takeaways include:

  • If a digital asset is being sold as part of an investment, to non-users, by promoters to develop an enterprise, with the expectation that investors can earn a return on their investment, then it is most likely a security, regardless of what label — ICO, utility token — it is given, according to Hinman.
  • Digital assets originally offered as a security could, over time, become something other than a security when “there is no longer any central enterprise being invested in or where the digital asset is sold only to be used to purchase a good or service available through the network on which it was created,” noted Hinman.
  • The offer and sale of bitcoin and ether are not securities transactions, and “over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required,” said Hinman.

“Director Hinman’s remarks bring additional clarity to the securities law treatment of digital assets,” notes Genesis Block co-founder Sam Proctor. “These additional data points will be highly useful to companies looking to implement a token launch, and Genesis Block is well-equipped to help our clients navigate this highly dynamic market landscape and make the right business decisions.”

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