TL;DR
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Reg Crypto has made it from the SEC to the OIRA
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It distinguishes tokens from securities and sets a framework for fundraising via tokens
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Another step away from the enforcement-by-litigation strategy by former SEC chair Gensler
The first ever crypto rule from the SEC may be about to see the light of day. SEC chair Paul Atkins confirmed that the Reg Crypto rule has made it all the way to the Office of Information and Regulatory Affairs (OIRA). This is one of the last stages for a federal rule and the last real narrow passage for it to become an actual federal rule. Atkins said:
We'll have reg crypto that we'll be proposing here shortly. It's in fact at OIRA right now.
Reg Crypto is a proposed rule for crypto startups to raise money without having to register the token as a security first. Under this rule, there would be a clear legal framework for how to raise funds via, for example, an ICO.
The rule has two main components. First, it allows startups to raise up to $5 million in four years, counting from the first token raise. Rather than registering the token as a security, the raising party can instead just register with the SEC with “principles-based” disclosures. This is a lot less than the very rigid framework for a traditional IPO. The rule also states that raising through tokens can be done in addition to other fundraising methods.
Second, it makes a clear distinction between tokens and securities. Under existing rules and regulations, a token holder is almost always considered to be dependent on the project’s team's effort to make profit. Under the Howey test logic, that would mean the token is a security.
But with the new rules, there’s a distinction between when a network is decentralized enough for it not to be considered a security anymore. This is called the safe harbor, and under these circumstances, the SEC would no longer oversee the token, excluding in antifraud cases.
The two components of the rule both rely on the joint interpretation of token classifications from the SEC and CFTC from March 17th, which separates tokens into five categories: digital commodities, collectibles, tools, stablecoins and digital securities.
The idea of making this sort of distinction has been around for a while. Back in 2020 a similar rule was suggested by Hester Peirce but it never gained any traction with then-chair Gensler. Atkins has credited Peirce with a lot of the groundwork for the new suggested rule.
Part of New Strategy from the SEC
In combination with the CLARITY Act, which is expected for Senate markup in late April, this is part of the new strategy with clear regulation, rather than the Gensler-era of enforcement-by-litigation, essentially suing left and right to figure out what is right and wrong. It makes it a lot more straightforward to run a crypto based business in the United States.
The OIRA is the last step before being published as a proposed rule. The office has a 90 day cap on processing time but there have been some indications that this rule could get an expedited timeline. After that it goes out for public comment before it can become a federal rule.
