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Source: Galaxy; Compilation: Bitchain Vision
The U.S. SEC Finance Department took a landmark move to send DoubleZero a letter of non-action (“NAL”) to DoubleZero on the 2Z token issuance, which stated that “according to the facts provided, the department will not recommend enforcement actions.”
This week, a crypto project came to seek forward-looking guidance on the legal status of the proposed token issuance and received a fruitful response.
Previously, during Gary Gensler’s chairmanship of the Securities and Exchange Commission (SEC), the regulatory environment faced by crypto industry practitioners was quite distinctive: the SEC’s guidance was almost entirely “retrospective law enforcement” – the project that was originally invited to “come to register” eventually received a Wells Notice when it exited (process).AlthoughThis victory for cryptocurrency is largely attributed to the SEC’s perspective and leadership shift, but DoubleZero’s legal team clearly outlined the token’s design, which is also commendable.
The SEC’s non-action letter indicates that the agency’s staff had no intention of recommending enforcement actions against the parties concerned in response to the proposed activity, which provided regulatory comfort to the requester, but did not formally bind the SEC.While such letters are not legally precedent, they are often influential and can clarify the gray areas of securities laws and guide industry practices, thus becoming an effective signal of regulatory tolerance and expectations.
Before this NAL, the only other such forward-looking guidance from the SEC on token issuance was the NAL released in April 2019 for TurnKey Jet.In that NAL, SEC staff said that as long as the token is not traded in the secondary market, maintains a stable value of $1, and can only be used to purchase the issuer’s services (essentially, it must operate like airline mileage or other reward programs, a highly restrictive design), the SEC will not take enforcement action.DoubleZero NAL reflects a positive view of tokens with significantly improved practicality and tradability, and therefore represents a significant progress that the SEC is good for the crypto industry.
DoubleZero’s publicity is interesting: 2Z is not a speculative profit claim, but a functional incentive token designed to coordinate a decentralized physical infrastructure (DePin).The project aims to build a low-utilization fiber bandwidth network around the world and create a decentralized dedicated Internet for distributed systems such as blockchain.The network is designed to incentivize fiber infrastructure owners (network providers) to make the most of their idle fibers and to incentivize operators (network participants) to coordinate traffic routing between network provider infrastructure to maintain the robustness and failure resistance of the network.Network users accessing this private internet will need to pay to access the network; this fee will be programmatically allocated to efficient network providers and participants in the form of 2Z tokens.
In a letter to the SEC, the DoubleZero team focused on the fourth aspect of the Howie Test: whether holders can reasonably expect profits based on other people’s management efforts.DoubleZero effectively explains that the 2Z token only serves as a coordinated bandwidth provider and user.The expected profits (and losses) of network providers and network participants are directly attributed to their own contributions and operations to the Double Zero network, rather than the actions of others.DoubleZero defines network providers and participants as working within the scope of the operating rules that motivate the network, and the SEC has given the green light (twice).All aspects of the asset must pass the Ouvian test before it can be considered an investment contract (and therefore also a securities), and the 2Z token is not regulated by the SEC without a fourth aspect (an expected to profit from the efforts of others).
Commissioner Hester Peirce publicly praised the letter and used it to reiterate one of her long-standing views: SEC’s securities analysis should be based on economic substance rather than form.Peirce, who has long been a checker and balancer in the SEC’s overpowering actions under her predecessor, Gary Gensler, disagrees with many of the SEC’s cryptocurrency enforcement actions.After being appointed as the head of the SEC’s newly formed cryptocurrency task force, she delivered a “new paradigm” speech, pointing out that many digital assets are not securities and pushing for safe harbors tailored for tokens.NAL this week is one of the first concrete actions taken by SEC staff in this regard.Under Peirce, the Cryptocurrency Task Force hosted five industry roundtables and held more than 150 meetings with cryptocurrency companies and other stakeholders.
Galaxy’s opinion:
This move by the SEC is an encouraging move for the cryptocurrency industry.For years, cryptocurrency projects have been viewed as criminal businesses by default and faced one of the following terrible options: being suppressed by law enforcement; going through an opaque, slow registration process (only one project has been successfully registered); or refusing to provide services to U.S. residents (nevertheless, many U.S. residents have managed to bypass geofencing).
Before this announcement, the only crypto project we know of to succeed on the SEC (if it could be called SEC) was Blockstack (later renamed Stacks) and its STX tokens.Stacks issued its tokens through a crowdfunding exemption (Reg A) in a registered securities offering, allowing for minimal disclosure.Two years later, Stacks itself determined that its network was decentralized enough to not fall into the securities category, so it stopped submitting applications to the SEC.After three years of investigation, the SEC chose not to crack down on Stacks.This is not so much acquiesced to the project’s position this week.
This is obviously a victory for DoubleZero, but it can also be a boon for token designers around the world.This provides a roadmap for building and developing functional utility tokens, The SEC will not consider this as an investment contract, but it is crucial that NAL can only be seen as an explanatory guide for tokens that are basically similar to the design described by DoubleZero.While SEC staff made it clear that they would not take enforcement action against DoubleZero on the grounds that such token offerings were investment contracts, NAL did not fully elaborate on the SEC’s views on the design of all types of tokens.The relief is conditional and depends on the circumstances.This is a staff level relief, not a broad rule change.It does not legalize previous allocations or token flows outside of limited design.If the facts change or the SEC’s perspective changes (e.g. under different governments), it does not hinder future law enforcement.For every token trying to emulate the 2Z structure, the legal team needs to be disciplined, documented, and strictly adhere to the “practical priority” structure described in the NAL.
While this is a highlight for the cryptocurrency industry, it may be the last news we have heard from regulators in a while, both good and bad news.The federal government has been shut down due to budget disputes, which unfortunately has been common among successive governments.Before the dispute is resolved, we have low expectations of regulators (markets predict that the government shutdown will last for more than two weeks).
The government shutdown may indeed delay other cryptocurrency actions we expect from the SEC to take, such as a key “innovation exemption” that allows stocks to trade within the DeFi app, and the SEC is working to achieve this “as soon as possible”, according to The Information.
Meanwhile, the Commodity Futures Trading Commission (CFTC) was in trouble, Brian Quintenz’s nomination for chairman was revoked, and Acting Chairman Caroline Pham became the sole member of the normally five-member committee.So, enjoy the good news from DoubleZero fund, because the next victory may have to wait for a while.
