Why Its Time to Re-examine the Cryptocurrency Safe Harbor

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Recently we have seen a great deal of interest from investors investing in cryptocurrencies and governments and regulators seeking to rein in the excesses.

Background  

In the U.S. Congress, early drafts of the Infrastructure Bill contained reporting obligations for trading platforms and holders of cryptocurrencies.

In July 2021, a Presidential Working Group consisting of the heads of the SEC, CFTC, Treasury, the Federal Reserve, and others was convened to examine cryptocurrency regulation, or more accurately stablecoins, in the U.S.

The Chairman of the SEC has characterized the crypto industry as the Wild West.  Last week, Treasury official Michael Hsu stated that the crypto industry needs “adults in the room…”

While the end result of all the regulatory activity is far from clear, there is some precedent that digital asset developers and trading platforms can use immediately to mitigate the risk of investigations or enforcement actions.

The Proposal

On April 13, 2021, SEC Commissioner Peirce released a “Token Safe Harbor Proposal 2.0.” (the “Proposal”).  Its purpose was to provide the crypto community with guideposts for the development of new currencies that would not automatically violate U.S. securities laws.

What is the Proposal?

The Proposal is a so called safe harbor which means that it is not a rule or regulation.  However, anyone who fulfills the requirements in the Proposal will have a defense against any investigation or enforcement action by the SEC.

What does the Proposal offer in simple terms?

A 3 year grace period during which developers can launch and grow a decentralized crypto network that is exempted from the key portions of securities laws.

What portion of the securities laws does the Proposal exempt?

The registration provisions that require, in the absence of an exemption, preparing a registration statement, obtaining audited financial statements, and filing and negotiating the registration statement with the SEC .  Developers are still subject to the anti-fraud provisions of securities laws.

What does it take to qualify?

The correct intent in launching the network, website disclosures, and reporting to the SEC.

What is the correct intent? 

The initial development team must have the intent for the network to reach maturity within 3 years of the initial sale of tokens.

What disclosures are required?

There are two categories of disclosures: initial disclosures and semi-annual disclosures.  Initial disclosures are made on a free website before filing a notice of reliance on the Proposal.  This includes information on source code, transaction history, token economics, plan of development, prior token sales, initial development team, trading platforms that trade the token, sales of tokens by initial development team, related party transactions, and warning to token purchasers.

Semi-annual disclosures are made every 6 months after the filing of the notice of reliance on the Proposal.  Semi-annual disclosures focus on the plan of development.  Specifically, the current state and timeline for development of the network, and when the initial development team intends to achieve network maturity.

What is the required reporting to the SEC?  

The Proposal requires 2 reports to be filed with the SEC: an initial notice of reliance, and an exit report at the end of the 3 year period.

 

For more information, please contact:

Kresimir Peharda, Partner

kpeharda@yklaw.us

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