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The SEC's Division of Corporation Finance says token buybacks, network upgrades and marketing claims do not automatically make a crypto asset a security. In an updated FAQ released Friday, the division said a buyback for an already functioning network would not, by itself, make its token subject to an investment contract. The answer may differ when a network is not functional and issuers pitch buybacks as a source of returns.
Why it matters
The FAQ also addresses how ongoing development fits into the Howey test. For a functional crypto system, efforts to secure, maintain or improve the network, or support its network effects, would not count as the relevant managerial efforts, the division said. Marketing existing uses or future features generally would not create an expectation of profit, provided the claims do not promote potential returns.
The guidance builds on the SEC's March interpretive release on applying securities laws to crypto assets. It comes after the Clarity Act failed to advance in the Senate, leaving market participants to navigate existing laws and agency guidance. The FAQ stresses that conclusions depend on the specifics of each case, so it is not a blanket exemption for tokens or projects.
Market impact
The SEC's position gives functioning networks and their supporters clearer boundaries around buybacks, development and communications. It may reduce uncertainty for projects whose activity centers on maintaining or improving a live system, but the distinction between a functioning network and one still being built remains important.
The CFTC separately updated its crypto FAQ on Thursday. Futures firms and clearinghouses may invest customer funds in tokenized versions of previously permitted assets if investment and custody requirements are met. Regulated firms may also use blockchains for recordkeeping, provided they can produce records if a blockchain or block explorer is unavailable.
Frequently asked questions
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Does a token buyback automatically make a crypto asset a security?
No. The SEC FAQ says a buyback for an already functioning network would not, by itself, make its token subject to an investment contract.
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Why does a network's functional status matter under the SEC FAQ?
The SEC says its answer may differ when a network is not functional and issuers promote buybacks as a source of returns for holders.
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How does the FAQ treat development after a crypto network launches?
For a functional system, efforts to secure, maintain or improve it, or support network effects, would not count as the relevant managerial effort under Howey.
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Can crypto projects promote future features without creating an expectation of profit?
The FAQ says marketing existing uses or future features generally would not create that expectation, as long as the claims do not promote potential profits.
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What did the CFTC say about tokenized assets and blockchain records?
Futures firms and clearinghouses may invest customer funds in tokenized versions of previously permitted assets if requirements are met. Firms using blockchains for records must still be able to produce them if a chain or explorer is unavailable.
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