Legal

How the SEC should categorize tokens: a16z Crypto


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The SEC has some questions, and it seems a16z might have some answers.

In a 50-page filing, a16z addressed the newly-established Crypto Task Force, and some of the 50-page filing is filled with what you’d expect: how a16z Crypto thinks that the Howey Test should be utilized on a crypto company, their thoughts on what’s needed for a decentralized regulatory framework, and so on.

The biggest takeaway is simple: “When control is eliminated, the application of securities laws should be limited; when control is present, traditional (but modernized) approaches should be used.”

Makes sense, right? This approach is technologically neutral while also appeasing the fact that this industry needs some regulation (a point I think we can all finally agree on). Essentially, regulators should just need to get ahead of potential risks, rather than using merit as an assessment.

But the 50-page filing also included nuggets that don’t just apply to the SEC, and they’ve very kindly labeled categories of tokens for all of us.

These include: Network Tokens, Security Tokens, Company-Backed Tokens, Collectible Tokens, Arcade Tokens, Asset-Backed Tokens, and Memecoins.

Admittedly, there could be more, but the a16z Crypto team noted that these are the main types they’ve seen in the space. And, honestly, they check out in my book.

Now I know what some of you are thinking: We have a friendlier SEC. Is a filing explaining this to our very own Crypto Mother Hester Peirce really necessary? Yes. Mostly because crypto lacks the regulatory framework and legal precedents to protect the industry should non-crypto folks step back into the SEC.

Okay, so let’s go back to the token classifications. For network tokens, the suggestion is a “control-based decentralization framework guidance” for such tokens. The requirements would separate a network from the definition of a company, allowing profit expectations to network as opposed to a more centralized entity.

And, perhaps one of the most important tidbits: There should be guidance that properly lays out the conditions for liquidity for sales by insiders so that they differ from securities transactions.

“Doing so could help to restrict persons that exert control over a network token from participating in secondary markets of such a token and limit their ability to act on potential information asymmetries,” thereby solving a problem that’s popped up a few times in crypto.

Simply put, asset-backed tokens refer to stablecoins and wrapped tokens. And, well, as you saw yesterday, those are (hopefully) getting their own regulatory frameworks. A collectible token is another easy one, basically just something — like a piece of art, music, etc — that’d be protected under a safe harbor proposal.

Along those lines, an arcade token isn’t something you can use in an actual arcade (if you can find one that’s still open), but rather a form of currency within a game or online economy.


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