An Associate Professor at Cardozo Law School, Aaron Wright, recently commented on the possibility of a security becoming a non-security token at some future time, and his comments hit the nail on the head on a very important question in the cryptocurrency space: Is it possible for a token that is a security to transform into a non-security utility token at some point in the future?
Professor Wright in a recent Quartz Media article is reported of stating as follows:
“The idea that ‘you can sell [a token] as an investment opportunity to other investors and somehow it transmutes into a commodity down the line [when the software is written], that’s not how the law works,’ he says. ‘If you purchase something from a group and you expect to make a profit off that group, in the US, that is deemed a security. This idea that functionality or timing has significance doesn’t have precedence under US law.'”
Wright’s comments make perfect sense. What is intriguing, however, is that SEC Chairman Jay Clayton in a recent speech has apparently suggested otherwise. As reported by CoinDesk, Clayton in his speech to students at Princeton University (the speech is not published on the SEC website) purportedly stated when drawing an analogy describing the difference between a utility and security token:
“‘If I have a laundry token for washing my clothes, that’s not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I’m buying them because I can sell them to next year’s incoming class, that’s a security,’ he explained.
Still, he suggested that such a definition can evolve over time.
‘What we find in the regulatory world [is that] the use of a laundry token evolves over time,’ he continued. ‘The use can evolve toward or away from a security.’
Further, nations may experiment with sovereign cryptocurrencies, while startups might develop different kinds applications with the underlying technology, he added.
Whether a token qualifies as a security could also change as the industry evolves, [Clayton] said, adding:
‘Just because it’s a security today doesn’t mean it’ll be a security tomorrow, and vice-versa.'”
Is it possible that a security token can later become a utility token? If so, how? While we can speculate on what Clayton meant or whether his comments were misunderstood, one thing we can all agree on is this is an area ripe for SEC guidance. And if the SEC decides that a security token can later become a non-security utility token, this may well be the beginning of a restructuring of the federal securities laws.
See Quartz Media article detailing Aaron Wright’s comments:
And here is the CoinList article referenced above:
The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.