The lack of regulatory clarity in the United States could undermine the economic potential of utility tokens issued under the Initial Coin Offerings (ICOs) crypto crowdfunding model, the Token Alliance said on Monday. The association of more than 120 members, including Accenture, Circle, BNP Paribas, Cisco, Golem, IBM, and CME Group, has released its first guideline and introduced the term ‘token sponsor’, which is a company that develops coins that are not under the scope of either the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).
The Alliance, led by former SEC Commissioner Paul Atkins, acknowledged that some tokens could be considered securities if they offer “an expected rate of return or potential of growth”. However, the advisory group said that several ‘utility tokens’, which were not securities, had been deemed in this category by SEC.
“Unfortunately, several entities purported to create and distribute “utility tokens”, but were charged by the SEC, either by using the Howey Test as having issued unregistered securities, or for fraud. The resulting settlements, statements by SEC officials, and the subpoenas have created regulatory uncertainty because the Howey Test is a case-by-case examination of facts and circumstances.
An overly expansive interpretation and application of the Howey Test could threaten the utility of blockchain technology and could stifle innovation,” the report noted.
The Howey test came from the landmark 1946 US Supreme Court decision that gave the SEC guidelines on how to determine if particular assets are securities or not. Under the US federal Securities Act, all investment contracts are securities.
The Token Alliance created the term ‘token sponsor’ with several guidelines, which give ICO issuers advice on how to avoid coming under the scope of SEC and CFTC. The proposed measures include the timing of distribution of a digital coin, the advice to not sell tokens on credit, developing of a complete and accurate white paper that must be reviewed by legal counsel, or designing the tokens in a way so that holders do not expect profits from the token’s project.
“These industry-developed principles are an important tool for responsible growth and smart regulation that strikes the right balance between protecting investors while allowing for innovation in this new technological frontier,” Paul Atkins, CEO of Patomak Global Partners co-chair of Token Alliance said in a press-release.
“We think it is important to explain the unique attributes of blockchain-based digital assets, which are not all strictly investment based, and provide guidance to consumers, regulators and the industry.”