Unraveling the SEC's Crypto Mystery: Project Crypto Unveiled
Good day, everyone! I'm thrilled to be here, continuing our journey towards America's leadership in financial innovation. Today, I want to delve into the next phase of our mission, focusing on fairness and common sense in regulating crypto assets.
In the upcoming months, we aim to establish a token taxonomy, guided by the Howey investment contract analysis, while acknowledging the limits of our laws. This approach builds on the groundbreaking work of Commissioner Hester Peirce, who has envisioned a transparent and coherent framework for crypto assets, grounded in reality, not fear.
My speech today revolves around three key themes: the importance of a clear token taxonomy, understanding the Howey test, and its implications for innovators, intermediaries, and investors. I also want to emphasize my support for Congressional efforts to create a comprehensive crypto market structure framework.
A Decade of Uncertainty, No More
If you're tired of the "Are crypto assets securities?" debate, I get it. It's a complex question because "crypto asset" isn't defined in federal securities laws. It's a tech term, telling us how records are kept and value transferred, but not the legal rights or economic reality of a transaction.
Most crypto tokens aren't securities. A token might have been part of a securities offering, but that doesn't make it a security forever. It's a simple application of the securities laws. The statutes list familiar instruments like stocks and bonds, but also include the "investment contract," which describes a relationship, not a permanent label.
Investment contracts have a beginning and an end. They don't last forever just because the asset continues to trade on a blockchain. Yet, many have argued that once a token is part of an investment contract, it's always a security. This view is flawed and doesn't align with the law or common sense.
Developers, exchanges, and investors have been navigating this uncertainty. They see tokens as payment instruments, governance tools, collectibles, or access keys. They encounter hybrid designs that don't fit into existing categories. And they've been treated as if all tokens are common stock, which is unsustainable and impractical.
This perspective leads to high costs and little benefit. It's unfair to market participants and investors, and it's not legally sound. It encourages a race offshore, as innovations move to jurisdictions that distinguish asset types and provide clear rules.
Project Crypto: Drawing Clear Lines
We, as a regulatory agency, are committed to drawing clear lines and explaining them. Here are the core principles guiding Project Crypto:
Stocks and Bonds: A stock is a stock, whether it's a paper certificate, a DTC account entry, or a token on a blockchain. Bonds remain bonds, even if tracked using smart contracts. The representation doesn't change the nature of the security.
Economic Reality: Labels don't trump reality. Calling something a "token" or "NFT" doesn't exempt it from securities laws if it represents a claim on enterprise profits and is offered with promises based on others' efforts. Conversely, a token's past as part of a capital-raising transaction doesn't make it a stock.
These principles are rooted in the Supreme Court's insistence on looking at the "substance" of a transaction, not its "form." The challenge is the rapid evolution of asset types, requiring us to provide guidance quickly.
A Coherent Token Taxonomy
Based on months of engagement with market participants and public input, here's my current thinking on crypto asset categories:
Digital Commodities/Network Tokens: In my opinion, these are not securities. They are intrinsically linked to and derive value from a "functional" and "decentralized" crypto system, not from the managerial efforts of others.
Digital Collectibles: These are not securities. They are designed to be collected or used, representing rights to artwork, music, videos, trading cards, in-game items, or digital memes, characters, events, or trends. Purchasers don't expect profits from others' managerial efforts.
Digital Tools: These are not securities. They perform practical functions like membership, tickets, credentials, or identity badges. Purchasers don't expect profits from others' managerial efforts.
Tokenized Securities: These are and will remain securities. They represent ownership of a financial instrument, maintained on a crypto network.
Howey, Promises, and Endings
While most crypto assets aren't securities, they can be part of or subject to an investment contract. These assets are accompanied by promises to undertake essential managerial efforts, satisfying the Howey test.
The Howey test requires an investment of money in a common enterprise with a reasonable expectation of profits from others' essential managerial efforts. A purchaser's expectation depends on the issuer's promises.
In my view, these promises must be explicit and unambiguous. A non-security crypto asset can separate from an investment contract when the issuer fulfills, fails to satisfy, or terminates the promises.
For context, William J. Howey's citrus empire in Florida's rolling hills provides an example. His company sold grove land to investors and offered to cultivate and market the fruit. The Supreme Court established the Howey test, but today, the land tells a different story. The mansion stands, but the citrus groves are gone, replaced by resorts and golf courses.
The soil around Howey's mansion was never a security. It became one through a specific arrangement, and ceased to be when that arrangement ended. The land remained the same, but the enterprises built upon it changed completely.
Commissioner Peirce rightly observed that a project's token launch might involve an investment contract, but those promises don't last forever. Networks mature, control disperses, and the issuer's role diminishes. Purchasers no longer rely on the issuer's efforts, and most tokens trade without a particular team's involvement.
Once the investment contract ends, the token may continue trading, but those trades aren't "securities transactions" due to the token's origin story.
I support "super-apps" in finance, allowing custody and trading of various asset classes within a single regulatory license. I've asked Commission staff to prepare recommendations to allow tokens tied to investment contracts to trade on non-SEC regulated platforms, including CFTC-registered intermediaries or state-regulated regimes.
This approach doesn't mean fraud is acceptable. Anti-fraud provisions still apply to misstatements and omissions, even when the underlying asset isn't a security. The CFTC also has authority to pursue misconduct in trading commodities.
Regulation Crypto: A Tailored Approach
In the coming months, I hope the Commission considers a package of exemptions to create a tailored offering regime for crypto assets that are part of or subject to an investment contract. I've asked staff to prepare recommendations that facilitate capital formation, accommodate innovation, and protect investors.
By streamlining the process, blockchain innovators can focus on development and user engagement, rather than navigating regulatory uncertainty. This approach cultivates an inclusive, dynamic ecosystem, where smaller projects can experiment and thrive.
We'll continue working with CFTC, banking regulators, and Congress to ensure non-security crypto assets have an appropriate regulatory regime. Our goal is not to expand SEC's jurisdiction, but to allow capital formation and protect investors.
We'll continue listening and engaging with investors, builders, and traditional financial institutions. We'll support Congressional efforts to codify a sound market structure framework.
Integrity, Intelligibility, and the Rule of Law
This framework is not a promise of lax enforcement. Fraud is fraud, and the SEC protects investors. Other regulatory bodies also police and protect against illicit conduct. If you raise money to build a network and then disappear, you'll hear from us.
This framework is a commitment to integrity and intelligibility. We should offer more than threats to entrepreneurs willing to comply with clear rules. We should provide clarity to investors distinguishing between tokenized stocks and collectibles.
Most importantly, this framework recognizes the SEC's limited reach. Congress crafted the securities laws to address specific problems, not to regulate every novel form of value. We must acknowledge our limits and respect the autonomy of networks.
Contracts, Freedom, and Responsibility
As Commissioner Peirce reminded us, our work is rooted in the principle that free people should not be governed by arbitrary decrees. In a free society, economic rules should be knowable, reasoned, and appropriately constrained. When we overreach, we stray from this principle. When we recognize our limits, we honor it.
A reasonable Commission approach to crypto won't decide the market's fate, but it will ensure the United States remains a place for experimentation, learning, failure, and success, under firm and fair rules.
That's the essence of Project Crypto. That's the Commission's role. As Chairman, I commit to not letting fear trap us in the past. We will remember that behind every token debate, there are real people: entrepreneurs, workers, and Americans striving for prosperity. The Commission serves all three.
