🎓 a16z Crypto School – #13 Navigating Crypto Policy

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  • Was then famously CEO of Binance US but only stayed couple of months..

Regulatory Background

  • OFAC (office of foreign assets control). Sanctions tool so that eg war criminals cannot receive assets using financial system
    • Even if you are based abroad, because of the sanctions tools you are still subject to Treasury rules
  • SEC is the most important
    • they decide which tokens may constitute securities
    • or if you look like you’re operating a broker-dealer which needs special licensing
    • Securities rules were made for public companies in the 1930s
  • CFTC: commodity futures trading commission
    • eg regulate margin-lending, crypto futures, swaps
  • EU has regulatory environment that looks similar to US’s
  • Singapore simpler regime, more permissive
  • Japan more complicated

Securities Law

  • Reason we have it: belief that if someone makes an investment in “you”, they have a right to know who you are, what you’re doing, risk factors, funding source, governance, etc.
  • Key question is whether the value of the token depends on whether you as a management team succeed. If it does it is likely to be considered a security
  • Howey test/ SEC v. W.J. Howey (1946): Citrus grove tracts in Florida
  • The Supreme Court defined “investment contract”. Each of these 4 things must happen:
    1. An investment of money (so gifts/airdrops and earning not included)
    2. In a common enterprise
    3. With an expectation of profit
    4. Solely from the efforts of others (first point above)
  • The SEC doesn’t provide much guidance on which kinds of projects fit the above rules
    • “They rule by enforcement
  • SEC commissioner Hester Peirce proposed a “Safe Harbour proposal” saying that if you are launching a token project you have 3 years to achieve utility or decentralisation in your network.
    • If you can do one of those things you’re not a security
    • If you haven’t you get a path to legality
  • Today you have the Howey test
  • Crypto Rating Council proposal in 2019
    • Inspired by the association that produces movie ratings
    • Includes Coinbase and a bunch of other big players

Security or not a security?

  1. What are you distributing?
  2. How are you distributing it?

Membership models

New model that is gaining steam, key thing is limited transferability:

Examples from offline world, which are NOT securities

  • The only person I can sell back my insurance policy to is the company (not the public) which is why it’s not a security

CRC Score Card Reality Check

This CRC score card was created in 2019, since then, from Matt Levine in September 2021:

  • Yeah the SEC crossed them all out and wrote “all 5s, sorry.”
  • the current chair of the SEC agreed with the previous chair of the SEC “that he hadn’t seen a token yet that didn’t pass the Howey Test” for being a security

Gary Gensler profile

Profile in NYMag

  • Orders from revolut & friends go to wholesalers / dark pools and someone is paying for the order flow
  • “Jay Clayton said it pretty well in February 2018 in congressional testimony — that he hadn’t seen a token yet that didn’t pass the Howey Test.” Definition is broadly: “You exchange money with some common enterprise, and you’re anticipating profit based upon the efforts of that common enterprise.”
  • I’m sorry to remind people: We had peer-to-peer lending, and the companies that did it said, “Well, it’s just Aisha lending to Scott.” No. There was a company in the middle. They also started to say, “We’ll take your pool of money and we’ll lend it to people.” And then we brought that activity into the securities laws.

More Matt Levine

Money Stuff: The SEC Has Some Crypto Complaints – Aug 9th 2021

  • Predicts a particular focus on regulating DeFi lending products
  • You could argue that you are not expecting profits from “the efforts of others” but rather than autonomous, open source bit of code – the smart contract
  • If you sell securities to the public, you generally have to register them with the SEC, deliver a prospectus, have audited financials, etc. Or you can sell them under some exemption from those rules — for instance, if you only sell them to non-U.S. persons, or if you only sell them to “accredited investors” (meaning, roughly, rich people). 
  • There is the practical point that if investors put their cryptocurrency into a pot controlled by a smart contract, it is not controlled by people, so there is — not quite “nobody for the SEC to sue,” it could sue the programmers who wrote the contract or the people who promoted it on social media, but there is not really an issuer of the security to sue in the same sense that there would be for a stock offering by a company. The point here is that there is some genuine novelty in DeFi; it is really unlike the sorts of securities offerings that were on Congress’s mind when it passed the core U.S. securities laws in the 1930s. 
  • Blockchain Credit Partners sued by the SEC in summer 2021
    • According to the SEC’s order, Gregory Keough, Derek Acree, and their company Blockchain Credit Partners offered and sold securities in unregistered offerings through DeFi Money Market from February 2020 to February 2021. The order finds that they used smart contracts to sell two types of digital tokens: mTokens that could be purchased using specified digital assets and that paid 6.25 percent interest, and DMG “governance tokens” that purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from DMG governance token resales in the secondary market.
    • The DMG tokens are clearly securities
    • The 6.25%-interest mTokens are a bit of a harder question, because you could argue that those are not an “investment contract” but rather just a loan. If I borrow money from you at a fixed interest rate, that is not necessarily a security, even if I use the money to fund some harebrained get-rich-quick scheme. But the SEC argues that these tokens are “notes,” and the kind of note that counts as a security
    • SEC: “Applying the Reves four-part analysis, the mTokens are securities. First, Respondents sold mTokens to raise funds for the general use of its business, namely to purchase income-generating assets to pay interest on redeemed mTokens and excess interest to DMG token holders, and purchasers bought mTokens solely to earn 6.25% interest on their digital assets. Second, mTokens were offered and sold to the general public. Third, Respondents promoted mTokens as an investment, specifically as a way to earn a consistent return of 6.25% on digital assets. Fourth, no alternative regulatory scheme or other risk reducing factors exist with respect to the mTokens.
  • If most ICO tokens are securities, then the crypto exchanges that let people trade them are actually securities exchanges, and in the U.S. you need some licenses to operate a securities exchange.
    • Poloniex US settled with the SEC


  • Buy/burns, or staking, unlikely to turn something that wasn’t one into a security especially if done in an automated point
  • Fiat -> crypto payment rail is “money transmission” (MTL), requires special license per State, and have to register with FinCEN as a money services business
    • Getting a license is easy, the hard part is operating the license
  • Phantom income occurs when an individual is taxed on the value of their stake in a partnership (or another equivalent agreement), even if they do not receive any cash benefits or compensation. Phantom income can pose challenges for taxpayers when it is not planned for because it can create an unexpected tax burden.
  • Uniswap Labs SEC investigation which prompted them to remove some tokens from the “official” Uniswap UI (eg tokenized stocks as ERC20s)

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