A new industry initiative to disseminate token issuance best practices and regulatory recommendations has warned that utility tokens and their economic potential are under “threat of extinction” in the U.S. due to a lack of regulatory clarity.
“An overly expansive interpretation and application of the Howey Test could threaten the utility of blockchain technology and could stifle innovation,” states a new report from the Token Alliance, a coalition led by the Chamber of Digital Commerce – the U.S. blockchain and digital asset trade group.
The report, entitled “Understanding Digital Tokens: Market Overviews & Guidelines for Policymakers & Practitioners,” goes so far as to argue that digital tokens that are not securities or investments to be regulated as commodities are “under threat of extinction by regulation’ and that there is a pressing need for more regulatory certainty.
In the last year, several utility token-based companies have been charged with issuing unregistered securities by the Securities and Exchange Commission using the Howey Test, a four prong test dating back to the 1940s that is relied upon in determining if an investment instrument constitutes a security.
These case-by-case enforcement actions, along with subpoenas and public statements offered by SEC officials, have fostered uncertainty that has, in turn, produced a chilling effect on the nascent token industry within the U.S.
“Regulatory certainty is needed to enable innovative blockchain-based networks to flourish and fuel prosperity,” the report states, while also arguing that active participation and engagement by regulators is imperative for maintaining safe and accessible markets:
“Government has an essential role to play in supporting confidence in the rule of law and investor protection against malfeasance.”
Counting roughly 350 individuals and companies among its membership, including private sector companies, law firms, exchanges and consultancies, the Token Alliance was first convened in fall of 2017 during the midst of the initial coin offering boom. The purpose was to create and promulgate a unified voice on standards and best practices for an industry that was quickly gaining a Wild West reputation.
Since that time, numerous industry leaders have warned that self-regulatory efforts are needed within the industry – to clean itself up, so to speak – to minimize the threat of overly intrusive regulatory actions.
The guidelines laid out in the report aim to set a high standard for token issuers and exchanges to abide by while helping policymakers of all stripes better understand token ecosystems, token functionality and the potential benefits they offer.
“Understanding the wide variety of token types is critical to ensuring that regulators act with carefully guided steps,” the report states, warning:
“The wrong regulatory approach could create an environment of regulatory arbitrage, or even worse, unintentionally decrease the attractiveness of a jurisdiction regarding innovation and jobs creation.
Testifying to the group’s credibility, the Token Alliance counts among its co-chairs two former officials who served at the highest levels of the SEC and the Commodity Futures Trading Commission.
“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,” said Paul Atkins, CEO of Patomak Global Partners and a former SEC commissioner.
The other co-chair is Jim Newsome, a former chairman of the CFTC and now with Delta Strategy Group, a Washington, D.C. consultancy. He emphasized that token-based business models have the potential to “create unprecedented opportunities for investment, innovation and jobs,” adding that:
“This report will serve as an important resource for policymakers seeking to educate themselves and engage in meaningful industry dialogue.”
Digital Chamber founder and president Perianne Boring, who has been laying the groundwork for a broader, industry-wide self-regulation body, remarked that the Token Alliance report is a critical momentum builder toward that end: “It is a strong step towards self governance and a powerful tool to help builders and investors create a responsible and successful industry.”