Shearman & Sterling | FinTech | Senior SEC and CFTC Officials Support Balanced Approach to Token Regulation
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  • Senior SEC and CFTC Officials Support Balanced Approach to Token Regulation

    In testimony before a subcommittee of the US House Financial Services Committee on April 26, 2018, Securities and Exchange Commission Division of Corporation Finance Director William Hinman pushed back on calls to ban initial coin offerings. 

    In his testimony, he stressed that the SEC is taking a “balanced approach” that considers both capital formation and investor protection interests and argued that ICOs, when properly regulated, can be a valuable instrument that can be used to fund the development of transformative technology.  Hinman said that while he agrees that ICOs may be securities offerings subject to SEC jurisdiction, he acknowledges that it is possible for a token to be a utility token supported by a decentralized organization and not a security. 

    In related news, Commodity Futures Trading Commission Commissioner Brian Quintenz also discussed his agency’s approach to ICO and token regulation in a speech before the Eurofi High Level Seminar on April 26, 2018.He emphasized the CFTC’s mission to remain “technology-neutral” and promote innovation and argued that tokenization of a product does not necessarily alter its underlying qualities.As an example, he compares securities to utility tokens—while tokenizing a security does not exempt such tokens from regulation as securities, tokenizing rights to utilize a network (i.e., tickets to Disney World) does not necessarily make such tokens securities.

    These regulators are showing a willingness to entertain more nuanced approaches to regulation, which is encouraging, so long as any resulting innovations continue to consider both investors and entrepreneurs in a reasonable way.  We will continue to monitor regulatory developments in the FinTech space, particularly with respect to whether these recent pronouncements presage any future rulemakings.