{"id":14807,"date":"2020-03-05T16:32:34","date_gmt":"2020-03-05T16:32:34","guid":{"rendered":"http:\/\/mediashower.com\/blog\/?p=14807"},"modified":"2020-03-05T16:32:34","modified_gmt":"2020-03-05T16:32:34","slug":"the-sec-safe-harbor-blockchain-proposal-downloadable-guide","status":"publish","type":"post","link":"https:\/\/www.mediashower.com\/blog\/the-sec-safe-harbor-blockchain-proposal-downloadable-guide\/","title":{"rendered":"The SEC Safe Harbor Blockchain Proposal (+ Downloadable Guide)"},"content":{"rendered":"

Big news on the blockchain front: The U.S. Securities and Exchange Commission has made a proposal that would allow blockchain projects to once again thrive.<\/p>\n

Hester Peirce, the most forward-thinking SEC official on blockchain, put forth a proposal outlining a three-year \u201csafe harbor\u201d for new blockchain projects<\/strong> that would give them \u201crun room\u201d before worrying about securities law. Her proposal would also create \u201cbest practices\u201d that new projects would need to follow, ensuring more rigor for project creators and more protection for investors.<\/p>\n

You can read the full proposal here<\/a>, but below we\u2019ll explain the proposal in plain language, and why it benefits both blockchain investors and blockchain projects. First, let\u2019s explain why it\u2019s needed.<\/p>\n

The ICO Boom<\/h2>\n


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2017 was the year of the Initial Coin Offering. Entrepreneurs saw they could fund new blockchain projects by issuing \u201ctokens\u201d (i.e., blockchain-based units of value) that investors could buy and sell, as a startup company would issue shares of stock. Importantly, these were not<\/em> shares of stock: you didn\u2019t own a piece of the company, just a token.<\/p>\n

As new digital exchanges emerged to trade these tokens, and the price of many tokens begin to reach stratospheric heights, this formed a hype cycle. Entrepreneurs saw an easy way to raise money for a new project; investors saw an easy way to make money, because so many token holders were getting rich. Fueled by a lot of hot air, the bubble began to rise.<\/p>\n

In 2018, at the height of blockchain mania, regulators and lawyers began to indicate that maybe these tokens really were <\/em>like stocks, and should fall under the same laws. And with that, the bubble popped.<\/p>\n

The Crypto Winter of 2018<\/h2>\n


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Blockchain innovation became a confusing morass of obscure securities laws<\/strong> overseen by poorly-informed lawyers<\/strong>. To make things worse, securities laws vary between countries<\/strong>. Imagine creating a website where only residents from certain countries could access the site. The model doesn\u2019t work.<\/p>\n

What\u2019s more, blockchain evolves quickly<\/strong>. So a token may start out with one purpose (funding the project), then evolve into something else (becoming a payment for using the network).<\/p>\n

In fact, this is what happened with Ethereum. Originally, ether was used to raise funds to create the Ethereum network (which is pretty clearly a security, like a stock). But then ether became the \u201cpayment\u201d for using the Ethereum network, like the in-game currency that powers the network.<\/p>\n

Because of this \u201cregulatory uncertainty<\/strong>\u201d (two words we hope to never hear again), the torrent of blockchain innovation slowed to a trickle, and that trickle slowed to a freeze. Thus followed the great Crypto Winter of 2018. Blockchain projects went into hibernation. Startups huddled together for warmth, foraging for food and enduring the bitter weather.<\/p>\n

Then came Hester Peirce\u2019s proposal.<\/p>\n

The New Proposal<\/h2>\n


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Like all good ideas, it seems obvious when you hear it. Allow U.S. blockchain projects to have a three-year safe harbor, at the end of which they will be classified as securities (or not).<\/p>\n

In plain language, this means that entrepreneurs can launch new blockchain projects\u2014with best practices in place, explained below\u2014without worrying about whether their new token is a security. They can focus on building the network, building the community, building the blockchain.<\/p>\n

Investors can buy into these new tokens, without worrying about whether they are breaking an outdated securities law. They can buy, sell, and trade these tokens for three years, after which their holdings will be classified as securities (or not).<\/p>\n

In this three year \u201cgrace period,\u201d a few things might happen.<\/p>\n

The token might become a security<\/strong>. It might look like a stock, in which case the investors in the token would be investors in the project, and receive similar benefits as, say, a corporate shareholder.<\/p>\n

The token might not be a security<\/strong>. Like Ethereum, it might become something more like an \u201cin-game currency,\u201d a means of payment for using the blockchain network, in which case it would still be tradeable via digital exchanges, but not legally classified as a security.<\/p>\n

The project might not go anywhere<\/strong>. Most blockchain projects, like most startups, are not going to get traction. So early investors\u2014like early investors of any company\u2014might have tokens that are essentially worthless. This is the risk of being an early investor.<\/em><\/p>\n

Peirce\u2019s proposal elegantly solves a number of problems:<\/p>\n