The SEC delivered one of Friday’s most consequential regulatory updates when its Division of Corporation Finance expanded guidance on how securities law applies to functioning crypto networks.
SEC staff said a token buyback program does not automatically transform an existing crypto asset into an investment contract. The analysis changes when a network is not yet functional and promoters market buybacks as a source of investor returns. The Block, SEC crypto FAQ addresses token buybacks and network upgrades
The SEC also addressed continued development after a network launches.
According to the guidance, work to secure, maintain or improve an already functional network generally does not constitute the type of managerial effort central to the Howey investment-contract analysis.
Marketing existing network uses also generally would not create an expectation of profit, provided the marketing does not promote future investment returns. The Block
The guidance builds on the SEC’s March interpretive release covering the application of federal securities laws to crypto assets. SEC interpretive release on crypto assets
The CFTC separately updated its guidance to clarify that regulated futures firms and clearinghouses may invest customer funds in tokenized versions of otherwise permitted assets when investment and custody requirements are satisfied. Blockchain records can also satisfy recordkeeping obligations if firms can reproduce the records when required. The Block
TOKEN RECON ASSESSMENT
This is important practical guidance for mature crypto networks.
The SEC is drawing a clearer distinction between building a network investors depend upon for future profits and maintaining a network that already functions independently.
Projects should not interpret the guidance as a blanket exemption.
Marketing language, network maturity and promises of returns still matter.
Watch how token issuers adjust buyback programs and promotional language after this clarification.
Sources
SEC interpretive release on crypto assets
The Block, SEC crypto FAQ addresses token buybacks and network upgrades
