SEC staff on Thursday issued guidance offering clarifications on how certain cryptocurrency activities, including token buybacks, staking receipt tokens, and ongoing blockchain development, may be treated under federal securities laws. Published by the SEC’s Division of Corporation Finance, the guidance builds upon the Commission’s March interpretation but importantly, does not carry the force of law and has not been approved or disapproved by the Commission.
Guidance on Token Buybacks and Network Functionality
SEC staff indicated that the analysis for token buybacks can differ based on whether a crypto network is functional. Staff said that when a crypto network is already functional, announcing a buyback of a non-security crypto asset would not by itself amount to a promise to perform essential managerial efforts under the Howey test. However, when a network is not yet functional, a buyback could contribute to an investment contract if it is presented as generating yield or returns for token holders.
Staking Receipt Tokens: Digital Tools or Commodities
The guidance also addresses staking receipt tokens. Staff indicated that a staking receipt token representing a digital commodity that is not subject to an investment contract can be treated as a ‘digital tool’ because it serves as a receipt for the underlying asset. In some cases, a staking receipt token issued by a protocol-based liquid staking provider may instead be classified as a digital commodity when its value is tied to the operation of a functional crypto system and market supply and demand.
Developer and Market Operator Activities
Furthermore, SEC staff clarified that promoting a network’s current utility or capabilities would generally not, on its own, amount to a promise of essential managerial efforts. Aspirational statements about future features may also fall outside this analysis when they do not promote potential profits. Developers can continue maintaining, securing, and improving a functional network without those activities necessarily constituting essential managerial efforts under the Howey test. Similarly, operating a secondary market for a crypto asset does not automatically make a trading platform a promoter, though a trading platform would still have to meet the definition of a promoter under Securities Act Rule 405.
Limitations and Context
This guidance provides a degree of clarity for market participants navigating the complexities of federal securities laws in the context of evolving crypto activities. However, it is crucial to note that the interpretations offered are from SEC staff and are not binding legal rules. The analysis of specific crypto activities will continue to depend on their unique facts and circumstances.
Why This Matters
The materials describe a narrow update: SEC staff provided clarification through FAQs on how certain crypto activities, including token buybacks and staking receipt tokens, are viewed under federal securities laws, particularly in relation to the Howey test. The analysis for buybacks can differ when a network is not yet functional.
Broader Context
Source materials place the factual news in this context: The FAQs, published by the SEC’s Division of Corporation Finance, build on the Commission’s March interpretation.
