Think of it this way: if a token’s value is primarily driven by the efforts of a central management team (the “others” in Howey), it’s more likely to be considered a security. If, however, it thrives on a decentralized, functional network, the SEC might give it a pass. The key is distinguishing assets reliant on active management from those operating on a self-sustaining, decentralized basis.
Atkins outlined four core categories, providing a roadmap for navigating the regulatory maze:
- Digital commodities are not securities. These “network tokens” derive their value from a decentralized and functional system, not from managerial efforts. Think Bitcoin or perhaps even Ethereum (post-Merge), depending on your interpretation.
- Digital collectibles fall outside securities regulation. NFTs representing artwork, in-game items, and other collectibles are generally safe, as they aren’t typically purchased with the expectation of profits derived from others’ managerial efforts.
- Digital tools serve functional purposes. Membership credentials, tickets, identity markers, and other utility-focused tokens are also generally excluded. The emphasis here is on usage, not investment.
- Tokenized securities remain securities. This is the straightforward one. If a token represents ownership of an instrument already classified as a security, it’s still under the SEC’s purview.
While Atkins’ remarks provide much-needed clarity, the picture isn’t complete. He voiced support for congressional efforts to establish a federal market-structure statute for digital assets, suggesting the SEC recognizes the need for legislative action to provide a comprehensive framework.
Furthermore, Atkins previewed potential staff recommendations for a tailored offering regime for crypto assets associated with investment contracts. This hints at the possibility of specific exemptions designed to foster capital formation in the crypto space, potentially through a regulatory sandbox or similar mechanism. It’s worth noting that Sheppard Mullin Richter & Hampton are actively monitoring these developments within the compliance arena.
The SEC’s evolving framework, as articulated by Chair Atkins, suggests a more nuanced and pragmatic approach to digital asset regulation than some might have feared. While the agency remains vigilant in protecting investors, it also seems open to fostering innovation by distinguishing between assets that truly function as securities and those that operate within decentralized, functional ecosystems.
Whether this approach will ultimately lead to a thriving and well-regulated crypto market remains to be seen. But one thing is certain: regulated financial institutions and digital-asset platforms must closely monitor the forthcoming proposals to ensure they navigate the regulatory landscape effectively. The future of crypto depends on it.
