SEC’s Crypto Tango: Fog Lifts, Tokens Waltz Free? 🕺💃

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Law and Ledger – A legal chronicle of crypto capers, brought to you by the indefatigable Kelman Law, where digital assets meet legal finesse.

Penned with wit and wisdom by Alex Forehand and Michael Handelsman for the esteemed Kelman.Law.

The SEC’s Crypto Ballet: A Regulatory Pas de Deux 🩰

In a recent soliloquy titled “The Securities and Exchange Commission’s Approach to Digital Assets: Inside Project Crypto,” Commissioner Paul Atkins, with a flourish of his quill, hinted at a seismic shift in the SEC’s regulatory waltz. The old enforcement-driven minuet is passé; in its place, a choreography that embraces innovation while keeping a watchful eye on market integrity and investor protection. How très chic! 🕴️

For far too long, crypto entrepreneurs and investors have been mired in a regulatory “fog,” as Atkins so aptly puts it. Deciphering whether a token is a security has been a parlour game of the highest order, with success as elusive as a Waugh novel’s happy ending. But fear not, dear reader, for Atkins’ address offers a glimmer of clarity-a recognition that crypto is not a passing fad but a legitimate player in the U.S. financial markets. Integration, not isolation, is the new mantra. 🌟

Token Taxonomy: A Comedy of Categories 🎭

Atkins, with the precision of a Victorian taxonomist, divides digital assets into categories that reflect their function and purpose. No more one-size-fits-all tests, thank heavens! “Digital commodities” and “network tokens,” he declares, are not securities if they derive their value from a “functional” and “decentralized” crypto system, rather than the “essential managerial efforts of others.” How delightfully specific! 🧐

“Digital collectibles,” those tokens tied to art, music, or in-game items, are also off the hook. Purchasers, it seems, are not relying on managerial efforts for profit but are instead indulging in creative or cultural pursuits. How très bohemian! 🎨

Similarly, “digital tools,” whose primary purpose is functional-memberships, tickets, credentials-are not securities. Speculation, it appears, is not their forte. How refreshingly practical! 🎟️

But lest we get carried away, Atkins reminds us that “tokenized securities” remain securities under existing law. These crypto assets, representing traditional financial instruments recorded on a blockchain, are still very much in the SEC’s crosshairs. For more on this, see our article Are Tokenized Securities Still Securities? 🕵️♂️

Atkins’ framework moves the conversation toward a more nuanced understanding of digital assets, distinguishing between technological innovation and investment contracts. How very 21st century! 🚀

When Does a Token Stop Being a Security? 🕰️

One of the most tantalizing tidbits from Atkins’ speech is the idea that a crypto token can evolve over time. Echoing Commissioner Hester Pierce’s remarks, Atkins observes that while a token may initially involve an investment contract, those conditions “may not remain forever.” Networks mature, code is shipped, control disperses, and the issuer’s role diminishes or disappears. At some point, purchasers are no longer relying on the issuer’s managerial efforts, and the token trades independently. How very Darwinian! 🦖

“Networks mature. Code is shipped. Control disperses. The issuer’s role diminishes or disappears. At some point, purchasers are no longer relying on the issuer’s essential managerial efforts, and most tokens now trade without any reasonable expectation that a particular team is still at the helm.”

Atkins revisits the origins of the Howey Test with a vivid Florida analogy. The land underlying the original Howey citrus groves was never a security-it only became part of an investment contract through a specific business arrangement, and it ceased to be one when that arrangement ended. A century later, that same land hosts homes, golf courses, and resorts-a transformation that underscores his point: the underlying asset didn’t change, but the enterprise built around it did. Applying this to crypto, Atkins argues that digital tokens may likewise begin life as part of an investment contract, yet evolve beyond it once the promises are fulfilled and the issuer’s managerial role fades. How very Waugh-esque in its irony! 🍊

This formulation is compelling-it acknowledges the dynamic nature of tokens and networks, rather than treating security status as permanent. Still, Atkins leaves open important questions. What does “functional” mean in the context of a network’s independence? When is a network adequately “functional” such that token-holders are no longer relying on the issuer’s managerial efforts? What thresholds of “decentralization” suffice? To what extent must “control disperse[]”? Does the issuer’s role merely need to “diminish” (notwithstanding the inherent ambiguity in that alone), or does it need to “disappear[]” completely? How very bureaucratic! 📜

This ambiguity invites continued discussion, and the SEC has signalled its openness to industry feedback in shaping how those terms will be defined, including at what “point” a token ceases to be a security. How very democratic! 🗳️

What It Means for the Crypto Industry 🏗️

For token issuers and developers, Atkins’ remarks offer both optimism and direction. The SEC appears willing to distinguish between investment activity and network utility-a critical nuance that could allow projects to evolve legally as they do technologically. How very progressive! 🚀

In practical terms, issuers and developers should document how and when their role diminishes as networks mature. Platforms and custodians should prepare for a dual-regime world where some assets are securities, and others are not. And investors should continue to monitor forthcoming rulemakings from both Congress and the SEC’s Project Crypto team, which is expected to provide additional clarity on token taxonomy and investor protections. How very prudent! 📊

A Constructive Path Forward 🛤️

Commissioner Atkins’ tone was one of balance and optimism: regulation as a guidepost, not a hammer. His call for fair, clear, and functional oversight continues to mark a meaningful evolution in the SEC’s engagement with digital assets. For an overview of the SEC’s Project Crypto, see our article Project Crypto: A New Era in U.S. Financial Regulation. 🌍

While questions remain about what qualifies as sufficient “decentralization,” or a “functional” network, the spirit of the message is clear-the SEC is ready to work with the crypto industry, not against it. How very conciliatory! 🤝

At Kelman PLLC, we welcome this constructive approach and encourage clients in the digital-asset space to stay closely tuned to forthcoming guidance from Project Crypto and the Crypto Task Force. We continue to monitor developments in crypto regulation across jurisdictions and are available to advise clients navigating these evolving legal landscapes. For more information or to schedule a consultation, please contact us here. 🌐

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2025-11-18 09:59