RECENT GUIDANCE

SECURITIES REGULATION — FINANCIAL TECHNOLOGY — SEC

PROVIDES ANALYTICAL TOOLS FOR ASSESSING DIGITAL
ASSETS. — SEC, FRAMEWORK FOR “INVESTMENT CONTRACT”
ANALYSIS OF DIGITAL ASSETS (2019).

“Get your act together”: this was the pointed message that the
Chairman of the Securities and Exchange Commission (SEC) delivered
in a November 2018 interview to any startup funded by an initial coin
offering (ICO).1 But it is unclear how the typical startup should heed
that warning as the ICO space has been burdened with regulatory am-
biguity since its inception. On April 3, 2019, the SEC attempted to
provide clarity by releasing a “Framework for ‘Investment Contract’
Analysis of Digital Assets,”2 which is meant to “assist those seeking to
comply with the U.S. federal securities laws.”3 This framework is prom-
ising because it illustrates that the SEC is willing to exempt certain
blockchain-based digital assets from being treated as securities. While
the guidance represents an improvement from the incredible ambiguity
pervading this burgeoning field, it is an inadequate substitute for clear
legislation and judicial rulings.
Cryptocurrencies, like Bitcoin, are digital currencies that depend on
cryptography to verify and secure transactions, as well as to manage the
creation of new units.4 In contrast to conventional forms of money,
cryptocurrencies generally are not backed by a trusted institution and
are not liabilities of any particular entity.5 This lack of backing likely
contributes to the SEC’s fear of fraud in the ICO space.6 By way of
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
1 Zack Seward, WATCH: SEC Chairman Jay Clayton’s Full Consensus: Invest Interview,
COINDESK (Nov. 28, 2018, 5:13 PM), https://www.coindesk.com/sec-jay-clayton-consensus-invest-
video [https://perma.cc/9RZ4-G2WU].
2 SEC, FRAMEWORK FOR “INVESTMENT CONTRACT” ANALYSIS OF DIGITAL
ASSETS (2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-
assets#_ednref9 [https://perma.cc/3G6P-GG85].
3 Public Statement, Bill Hinman, Dir. of Div. of Corp. Fin., SEC & Valerie Szczepanik,
Senior Advisor for Digital Assets & Innovation, SEC, Statement on “Framework for ‘Invest-
ment Contract’ Analysis of Digital Assets” (Apr. 3, 2019), https://www.sec.gov/news/public-
statement/statement-framework-investment-contract-analysis-digital-assets [https://perma.
cc/27BK-QEME].
4 See Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 HASTINGS
SCI. & TECH. L.J. 159, 160 (2012). See generally id. at 162–65.
5 Lael Brainard, Governor, Bd. of Governors of the Fed. Reserve Sys., Cryptocurrencies,
Digital Currencies, and Distributed Ledger Technologies: What Are We Learning? (May 15,
2018), https://www.federalreserve.gov/newsevents/speech/brainard20180515a.htm [https://perma.
cc/8DWS-CH5Q].
6 For instance, SEC Chairman Jay Clayton expressed concern that, as cryptocurrency and ICO
markets are “currently operating, there is substantially less investor protection than in our tradi-
tional securities markets, with correspondingly greater opportunities for fraud and manipulation.”

2418
2019] RECENT GUIDANCE 2419

background, an ICO is a fundraising mechanism in which new projects

sell their underlying cryptotokens in exchange for fiat currency (for
example, cash) or cryptocurrency (for example, Bitcoin).7 An ICO func-
tions much like an initial public offering (IPO) as a means to raise capital
to fund a new development or project.8
But there is a key difference between ICOs and traditional fundrais-
ing mechanisms, such as IPOs, which makes it difficult to translate the
legal framework that regulates IPOs directly to ICOs. Rather than re-
lying on traditional backers and underwriters with a centralized ledger,
ICOs and their associated cryptocurrencies depend on distributed ledger
technology, of which blockchain technology forms a subset.9 As a result,
there is significant decentralization, and the underlying source infor-
mation is open to any market participant.10 This distributed ledger mit-
igates information asymmetry concerns, which the SEC regulations
are designed to protect against.11 Thus, the Securities Act of 193312
(Securities Act) and the Securities Exchange Act of 193413 (Exchange
Act) are not necessarily proper fits for regulating blockchain-based
digital assets.

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Public Statement, Jay Clayton, Chairman, SEC, Statement on Cryptocurrencies and Initial Coin
Offerings (Dec. 11, 2017), https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
[https://perma.cc/7UT9-4ARZ].
7 Investor Bulletin: Initial Coin Offerings, INVESTOR.GOV (July 25, 2017), https://www.
investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings
[https://perma.cc/TD62-SQSZ].
8 See Nathaniel Popper, An Explanation of Initial Coin Offerings, N.Y. TIMES (Oct. 27, 2017),
https://nyti.ms/2iGfts1 [https://perma.cc/PH8K-38BG].
9 “Distributed ledger technology . . . refers to the protocols and supporting infrastructure that
allow computers in different locations to propose and validate transactions and update records in a
synchronised way across a network.” Morten Bech & Rodney Garratt, Central Bank Cryptocurren-
cies, BIS Q. REV., Sept. 2017, at 55, 58. Distributed ledger technology provides a means of recording
account balances. In most other contexts, electronic transactions are recorded on a centralized
ledger, which is managed by a trusted intermediary (for example, a commercial bank) who “track[s]
account holders’ balances and, ultimately, vouch[es] for a transaction’s authenticity.” Trevor I.
Kiviat, Note, Beyond Bitcoin: Issues in Regulating Blockchain Transactions, 65 DUKE L.J. 569,
577 (2015). In contrast, with distributed ledger technology, the transaction record is distributed
across computers and other internet-connected devices in separate locations globally, without the
need for a trusted central authority. See id. at 577–78.
10 See Kiviat, supra note 9, at 578, 580.
11 See William Hinman, Dir., Div. of Corp. Fin., SEC, Digital Asset Transaction: When Howey
Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018),
https://www.sec.gov/news/speech/speech-hinman-061418 [https://perma.cc/7V44-8LSQ]; see also
Blockchain Ass’n, Open Blockchain Networks Are Incredibly Transparent, and It’s Good Public
Policy to Support Them, MEDIUM (Apr. 8, 2019), https://medium.com/@BlockchainAssoc/open-
blockchain-networks-are-incredibly-transparent-and-its-good-public-policy-to-support-them-
be1288a74ecd [https://perma.cc/A5WF-AGBB].
12 15 U.S.C. §§ 77a–77aa (2012).
13 Id. §§ 78a–78pp.
2420 HARVARD LAW REVIEW [Vol. 132:2418

Agencies often struggle to capture emerging technologies in

dusty regulatory frameworks14 — and the SEC is no different as it at-
tempts to capture ICOs in the Securities Act and the Exchange Act.15
These statutes define a “security” as a commonly traded financial instru-
ment, such as a note, stock, or bond.16 The definition also broadly in-
cludes more variable financial instruments, for instance an investment
contract.17
In SEC v. W.J. Howey Co.,18 the Supreme Court articulated a test to
determine if a financial instrument was an investment contract, and
therefore a security subject to the Securities Act and the Exchange Act.
The Court held that a transaction is an investment contract if: (1) there
is an investment of money, (2) in a common enterprise, with (3) a rea-
sonable expectation of profits to be derived from the efforts of a
third party.19 The Court has since focused on the substance of the trans-
action, rather than the form, to determine the nature of the financial
instrument.20
In July 2017, the SEC applied existing securities laws — including
the Howey test — to determine that some tokens were in fact securi-
ties.21 The SEC scaled up enforcement by creating a cyber unit to spe-
cifically target “[v]iolations involving distributed ledger technology and

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
14 See, e.g., Andy Pasztor & Robert Wall, Drone Regulators Struggle to Keep Up with the Rapidly
Growing Technology, WALL ST. J. (July 10, 2016, 7:52 PM), https://www.wsj.com/articles/drone-
regulators-struggle-to-keep-up-with-the-rapidly-growing-technology-1468202371 [https://perma.cc/
5T95-6LJT]; Gary Stern, Can Regulators Keep Up with Fintech?, YALE INSIGHTS (Dec. 13, 2017),
https://insights.som.yale.edu/insights/can-regulators-keep-up-with-fintech [https://perma.cc/Q5V6-
D989].
15 Hester M. Peirce, Comm’r, SEC, Regulation: A View from Inside the Machine, Remarks at
Protecting the Public While Fostering Innovation and Entrepreneurship: First Principles of Opti-
mal Regulation (Feb. 8, 2019), https://www.sec.gov/news/speech/peirce-regulation-view-inside-
machine [https://perma.cc/EQN2-PF5N] (acknowledging that “[t]oken offerings do not always map
perfectly onto traditional securities offerings”).
16 15 U.S.C. §§ 77b(a)(1), 78c(a)(10).
17 Id.
18 328 U.S. 293 (1946). In Howey, the owner of a Florida citrus grove proposed to sell a land
interest to investors. Id. at 295. The investors would then each contract with the current owner of
the citrus grove so that the current owner would tend to the trees and harvest the resulting produce.
Id. Any profit from the fruit would be shared between the investor and the citrus grove tender.
See id. at 296.
19 Id. at 298–99.
20 See SEC v. Edwards, 540 U.S. 389, 393 (2004) (“Congress’ purpose in enacting the securities
laws was to regulate investments, in whatever form they are made and by whatever name they are
called.” (quoting Reves v. Ernst & Young, 494 U.S. 56, 61 (1990))).
21 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The
DAO, Exchange Act Release No. 81,207, 2017 WL 7184670 (July 25, 2017). In this report, the SEC
described an investigation of the DAO, a virtual organization, and its use of distributed ledger or
blockchain technology to facilitate the offer and sale of DAO tokens to raise capital. Id. at *1–2.
2019] RECENT GUIDANCE 2421

initial coin offerings”22 and brought its first ICO enforcement action for
fraud against Maksim Zaslavskiy.23 Zaslavskiy started off his ICO
scheme with REcoin, marketing it as “The First Ever Cryptocurrency
Backed by Real Estate,”24 and pivoted to his second ICO, tokens that
were backed by diamond investments.25 But there were neither dia-
monds nor real estate.26 Although Zaslavskiy eventually pleaded
guilty,27 he and REcoin initially stated by way of defense that they
thought the whole scenario boiled down to a “lack of legal clarity as to
when an ICO or a digital asset is a security.”28
Recently, the SEC’s Strategic Hub for Innovation and Financial
Technology29 (FinHub) attempted to provide some clarity by issuing a
“Framework for ‘Investment Contract’ Analysis of Digital Assets,”
which provides a toolkit to apply the Howey test to digital assets.30 The
guidance quickly dispenses with the first and second prongs of the
Howey test, stating that the requirements for an “investment of money”

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
22 Press Release, SEC, SEC Announces Enforcement Initiatives to Combat Cyber-Based
Threats and Protect Retail Investors (Sept. 25, 2017), https://www.sec.gov/news/press-release/2017-
176 [https://perma.cc/36YJ-L28H].
23 See Patricia Hurtado, First Initial Coin Offering Fraud Case Ends in Guilty Plea,
BLOOMBERG (Nov. 15, 2018, 5:17 PM), https://www.bloomberg.com/news/articles/2018-11-15/
first-fraud-case-for-initial-coin-offering-set-for-guilty-plea [https://perma.cc/L9R5-QGM3]; see also
Patricia Hurtado et al., U.S. Judge Says Initial Coin Offering Covered by Securities Law,
BLOOMBERG (Sept. 11, 2018, 11:48 AM), https://www.bloomberg.com/news/articles/2018-09-11/
u-s-judge-says-initial-coin-offering-covered-by-securities-law [https://perma.cc/W2U4-D8GC].
24 SEC v. REcoin Grp. Found., Litigation Release No. 24,081, 2018 WL 1468815 (Mar. 26, 2018).
Zaslavskiy promised huge returns and fabricated a “team of lawyers, professionals, brokers, and
accountants” to raise hundreds of thousands of dollars from investors. Id. The SEC concluded
that there was no team and the coin was backed by nothing, and it warned Zaslavskiy he was
breaking the law. Id. With REcoin, Zaslavskiy “allegedly misrepresented [REcoin] had raised
between $2 million and $4 million from investors when the actual amount [was] approximately
$300,000.” Id.; see also Complaint at 2–3, SEC v. REcoin Grp. Found., LLC, No. 17-cv-05725
(E.D.N.Y. Sept. 29, 2017), ECF No. 1.
25 Hurtado, supra note 23.
26 Id.
27 Id.
28 Luis Urbina, SEC Brings Enforcement Action Against Two Companies Related to Initial
Coin Offerings, COVINGTON (Oct. 10, 2017), https://www.covfinancialservices.com/2017/10/sec-
brings-enforcement-action-against-two-companies-related-to-initial-coin-offerings/ [https://perma.
cc/8TY4-YR8D]. But this ambiguity was not an adequate shield. The court disagreed with Zaslavskiy
and held that neither the Exchange Act nor Rule 10b-5 was unconstitutionally vague as applied.
See United States v. Zaslavskiy, No. 17-cr-647, 2018 WL 4346339, at *7–9 (E.D.N.Y. Sept. 11, 2018).
29 In October 2018, the SEC announced the launch of FinHub to “serve as a resource for public
engagement on the SEC’s FinTech-related issues and initiatives, such as distributed ledger technol-
ogy (including digital assets), automated investment advice, digital marketplace financing, and ar-
tificial intelligence/machine learning.” Press Release, SEC, SEC Launches New Strategic Hub for
Innovation and Financial Technology (Oct. 18, 2018), https://www.sec.gov/news/press-release/2018-
240 [https://perma.cc/XWH5-X7GE].
30 SEC, supra note 2.
2422 HARVARD LAW REVIEW [Vol. 132:2418

in a “common enterprise” are “typically satisfied” in a digital asset trans-

action.31 FinHub focuses on the third prong of the Howey test and
provides an exhausting, but “not intended to be an exhaustive,”32 list of
over thirty factors to help determine if an investor has a reasonable ex-
pectation of profits derived from the efforts of others.33 For instance,
the guidance suggests looking at an active participant’s managerial role,
the functionality and progress of the project, and the quantity of the
funds raised.34
In conjunction with the framework, the SEC’s Division of Corporation
Finance issued a no-action letter stating that tokens issued by TurnKey
Jet (TKJ), an on-demand air charter service,35 were not securities.36
TKJ members purchase blockchain-based tokens, which “decreases the
settlement time and improves the efficiencies of paying for and obtain-
ing air charter services.”37 In deciding not to bring an enforcement ac-
tion, the SEC relied on, inter alia, findings that the project was “fully
developed and operational,” the tokens were “immediately usable for
their intended functionality,” and the tokens were “marketed in a man-
ner that emphasize[d] the functionality of the [t]oken, and not the po-
tential for the increase in [its] market value.”38
The framework and no-action letter indicate that the SEC is open to
excluding some blockchain-based digital assets from securities regula-
tions. This development is meaningful because it marks a shift away
from the former uncertainty, which was likely a function of the SEC’s
desire to promote innovation. Though the new framework is helpful, it
is not binding and is not an adequate substitute for clear rules upon
which market participants could rely. Through selective enforcement of
the most egregious fraud cases, the SEC has prevented judges from in-
terpreting the application of securities laws to digital assets, leading to
vague and nebulous regulation. As a result, some market participants
are calling for judicial intervention, and the framework may be geared
more toward guiding judges’ analyses in inevitable litigation than
equipping citizens to navigate ICOs.

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
31 Id.
32 Public Statement, Hinman & Szczepanik, supra note 3.
33 SEC, supra note 2.
34 Id.
35 Letter from James Prescott Curry, Counsel, TurnKey Jet, Inc., to Office of Chief Counsel,
Div. of Corp. Fin., SEC 1 (Apr. 2, 2019), https://www.sec.gov/divisions/corpfin/cf-noaction/2019/
turnkey-jet-040219-2a1-incoming.pdf [https://perma.cc/4D5N-BL7M] [hereinafter TurnKey Jet In-
coming Letter].
36 TurnKey Jet, Inc., SEC No-Action Letter (Apr. 3, 2019), https://www.sec.gov/divisions/
corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm [https://perma.cc/A8GV-6X7Y] [hereinafter
TurnKey Jet No-Action Letter].
37 TurnKey Jet Incoming Letter, supra note 35, at 2.
38 TurnKey Jet No-Action Letter, supra note 36.
2019] RECENT GUIDANCE 2423

The SEC’s guidance in the past suffered from internal ambiguity.

For instance, when the SEC announced that it would apply the Howey
test to tokens, the SEC’s press release title read: “SEC Issues Investiga-
tive Report Concluding DAO Tokens, a Digital Asset, Were Securi-
ties.”39 But, hedging slightly and adding to the ambiguity of whether
the SEC would, as a policy, apply securities law to ICOs, the press re-
lease’s subtitle read: “U.S. Securities Laws May Apply to Offers, Sales,
and Trading of Interests in Virtual Organizations.”40 The SEC also
seemed to conflate the regulation of tokens as cryptocurrencies with to-
kens as investment contracts. Acknowledging the important nomencla-
ture difference in a Senate hearing, SEC Chairman Jay Clayton stated:
“I want to go back to separating ICOs and cryptocurrencies. ICOs that
are securities offerings, we should regulate them like we regulate secu-
rities offerings.”41 But, again adding to the confusion and glossing over
the regulatory nuances in the same Senate hearing, the Chairman une-
quivocally stated: “I believe every ICO I have seen is a security.”42 As
institutional market participants enter the blockchain and cryptocur-
rency arena,43 clarity will be crucial.
The SEC justified an ambiguous application of securities regulation
as an effort to promote a particular objective — innovation. Specifically,
Commissioner Hester Peirce stated that “[a]mbiguity [in SEC policy] is
not all bad, of course. We might be able to draw clearer lines once
we see more blockchain projects mature. Delay in drawing clear lines
may actually allow more freedom for the technology to come into its
own.”44 However, as a counterpoint, lack of regulatory clarity may
be a barrier to entry and give market participants less appetite to take
risks. The uncertain landscape likely dampens innovation in blockchain
technology.
The ambiguity’s impact is evident in a recent ICO case in the Southern
District of California. In October 2018, the SEC obtained an emergency
court order enjoining Blockvest, a company that allegedly made a series

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
39 Press Release, SEC, SEC Issues Investigative Report Concluding DAO Tokens, a Digital As-
set, Were Securities (July 25, 2017), https://www.sec.gov/news/press-release/2017-131 [https://perma.
cc/VNU9-Q4CM].
40 Id. (emphasis added).
41 Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and
the U.S. Commodity Futures Trading Commission: Hearing Before the S. Comm. on Banking,
Hous., and Urban Affairs, 115th Cong. 24 (2018) (statement of Jay Clayton, Chairman, SEC).
42 Id. at 5 (emphasis added).
43 See, e.g., Michael J. de la Merced & Nathaniel Popper, JPMorgan Chase Moves to Be First
Big U.S. Bank with Its Own Cryptocurrency, N.Y. TIMES (Feb. 14, 2019), https://nyti.ms/
2EbTNMW [https://perma.cc/5JVP-UC8N].
44 Peirce, supra note 15.
2424 HARVARD LAW REVIEW [Vol. 132:2418

of fraudulent claims regarding its upcoming ICO, from selling any se-
curities.45 But in November 2018, Judge Curiel denied the SEC’s re-
quest for a preliminary injunction, finding the Commission could not
show that investors bought into the Blockvest ICO with an expectation
of making a profit from the efforts of others.46 This outcome represented
pushback from at least one court against the SEC Chairman’s warning
that “[i]f you finance a venture with a token offering, you should start
with the assumption that it is a security.”47 It was also the first time a
federal court determined that the SEC had not shown that a digital asset
offered in an ICO was a security. As a result, SEC v. Blockvest, LLC48
realized the SEC’s worst fears, as the court took away the SEC’s sole
discretion to interpret which tokens should qualify as securities.
However, in a reversal of the decision, in February 2019, Judge
Curiel granted the agency’s renewed injunction bid, finding that the
SEC had indeed made the case that Blockvest’s promotional materials
constituted an offer of unregistered securities containing materially false
statements.49 Judge Curiel “agree[d] with the SEC that the Howey test
is unquestionably an objective one”50 but disputed the SEC’s assertion
that, in the order denying the SEC’s request for a preliminary injunc-
tion, “the court [had] applied a subjective test” by relying “solely on the
beliefs of some individual investors.”51 Casting a wider aperture this
time, the court reapplied the Howey test to find that the tokens were in
fact securities and the promotional materials presented by the defendant
concerning the ICO constituted a prima facie violation of the Securities
Act.52 This reversal is evidence of the previous ambiguity in the space
regarding tokens as securities.
The SEC’s new framework demonstrates the agency’s desire to pro-
vide clarity and, more importantly, acknowledges that some blockchain-
based digital assets should not be treated as securities. For instance, the

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
45 SEC v. Blockvest, LLC, No. 18-cv-2287, 2018 WL 4955837, at *7 (S.D. Cal. Oct. 5 2018).
The SEC alleged Blockvest’s ICO fraudulently claimed it had been registered with the SEC and
even advertised approval from a fictitious government agency called the Blockchain Exchange
Commission. Complaint at 2, SEC v. Blockvest, LLC, No. 18-cv-2287 (S.D. Cal. Oct. 3, 2018),
ECF No. 1.
46 See SEC v. Blockvest, LLC, No. 18-cv-2287, 2018 WL 6181408, at *7 (S.D. Cal. Nov. 27,
2018).
47 Seward, supra note 1.
48 No. 18-cv-2287, 2018 WL 6181408.
49 See SEC v. Blockvest, LLC, No. 18-cv-2287, 2019 WL 625163, at *1 (S.D. Cal. Feb. 14, 2019).
50 Id. at *5.
51 Id. Rather, the court stated that it had “objectively inquire[d] into the ‘terms of promotional
materials, information, economic inducements or oral representations at the seminars,’ or in other
words, [inquired] into the ‘character of the instrument or transaction offered’ to the ‘purchasers.’”
Id. (internal citation omitted) (first quoting Blockvest, 2018 WL 6181408, at *7; and then quoting
Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009)).
52 Id. at *7, *9.
2019] RECENT GUIDANCE 2425

framework advises that a purchaser is less likely to be relying on the

efforts of others if an “unaffiliated, dispersed community of network us-
ers (commonly known as a ‘decentralized’ network),” rather than an
active participant, is responsible for “essential tasks or responsibilities”
of the project.53 This implies that the use of decentralized networks
makes a digital asset somewhat less likely to be an investment con-
tract — and therefore less likely to be classified as a security. The fact
that the SEC specifically named “decentralized networks” indicates that
it is signaling support for decentralized, distributed ledger technology
and is trying to meaningfully carve out a space where blockchain-based
tokens can function without being labeled securities. The SEC’s deci-
sion not to classify TKJ tokens as securities further supports the conclu-
sion that the SEC is providing a functional space for blockchain-based
assets to operate.
While the SEC’s framework marks progress in providing clarity, it
is not a substitute for transparent legislation or judicial rulings to guide
market participants. The SEC has been careful to say that the frame-
work is simply “[s]taff guidance,” is not legally binding on the SEC, and
is only meant to be an “analytical tool” to evaluate digital assets.54
Congress may provide more concrete guidance. On April 9, 2019,
Representative Warren Davidson reintroduced the Token Taxonomy
Act in Congress with growing support and an expanded list of cospon-
sors.55 The bill is specifically aimed at “exclud[ing] digital tokens from
the definition of a security” in the Exchange Act and Securities Act.56
Proponents of the bill believe that it would “eliminate . . . uncertainty”
and provide the clarity “required to spur continued investment and in-
novation in this technology.”57
As to courts providing clarification, through selective enforcement
the SEC has essentially precluded judges from interpreting how securi-
ties regulations apply to digital assets. The SEC has only acted in the
most flagrant fraud cases, which are more likely to settle out of court.58
The agency may delay providing clarity by all but ensuring that judges
do not get the chance to draw bright-line rules. But this approach leaves
the majority of the industry in the lurch. At this point, some market
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
53 SEC, supra note 2.
54 Public Statement, Hinman & Szczepanik, supra note 3.
55 See H.R. 2144, 116th Cong. (2019). An initial version of the bill was introduced by Rep.
Davidson on December 20, 2018. See H.R. 7356, 115th Cong. (2018). The Token Taxonomy
Act now has five cosponsors. See Blockchain Ass’n, The Token Taxonomy Act is Back, and We
Need it More than Ever, MEDIUM (Apr. 9, 2019), https://medium.com/@BlockchainAssoc/the-
token-taxonomy-act-is-back-and-we-need-it-more-than-ever-d2cbf0154776 [https://perma.cc/FX5Q-
DYBD].
56 H.R. 2144.
57 Blockchain Ass’n, supra note 55.
58 See, e.g., Mayweather, Securities Act Release No. 10,578, 2018 WL 6266203 (Nov. 29, 2018).
2426 HARVARD LAW REVIEW [Vol. 132:2418

participants are so frustrated with the SEC’s nebulous guidance that

they are explicitly requesting that courts intervene to provide clarity.
For instance, the SEC served Kik, a secure messaging platform, with a
notice stating that Kin, Kik’s token for in-app purchases, should have
been registered — but Kik claims “that Kin is a currency, not a security,”
and “does not need to be registered.”59 A court ruling on this particular
case “could help determine the scope of the SEC’s authority to tame the
unruly ICO market.”60
The framework may be the SEC’s attempt to speak to judges
more than to market participants as cases like those involving Kik and
Blockvest reach maturity. In discussing the analysis for digital assets,
for instance, the framework is careful to point out that the inquiry “is
an objective one, focused on the transaction itself and the manner in
which the digital asset is offered and sold.”61 While Director William
Hinman promised “plain English” guidance,62 the framework’s discus-
sion of objective, rather than subjective, analysis seems to directly
address the point of contention the SEC had with Judge Curiel in
Blockvest. In that sense, the SEC’s framework may be more about guid-
ing judges’ analysis in future litigation than providing tools for an av-
erage market participant to evaluate her digital assets.
While the SEC’s framework for analyzing digital assets is promising
in that it indicates that not all blockchain-based digital assets will be
treated as securities, clear guidance through judge-made bright-line
rules or legislation may be inevitable and necessary in the ICO space.
Even though there has been a “regulatory crackdown that threatened to
stifle the nascent market,” industry participants “have continued to pour
money into cryptocurrency startups.”63 Though the SEC “trie[s] to pur-
sue cases that deliver broad messages and have market impact beyond
their own four corners,”64 its selective enforcement approach and nebu-
lous guidance foreshadows intervention.

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59 See Yoav Vilner, The Case of Authorities vs. Kik: What Do We Know So Far?, FORBES (Feb.
18, 2019, 1:59 AM), https://www.forbes.com/sites/yoavvilner/2019/02/18/the-case-of-authorities-vs-
kik-what-do-we-know-so-far/#7da29a631b86 [https://perma.cc/3USH-ZPAW].
60 See Paul Vigna & Dave Michaels, Are ICO Tokens Securities? Startup Wants a Judge to
Decide, WALL ST. J. (Jan. 27, 2019, 11:00 AM), https://www.wsj.com/articles/are-ico-tokens-securities-
startup-wants-a-judge-to-decide-11548604800 [https://perma.cc/3VLG-YRFR].
61 SEC, supra note 2.
62 Nikhilesh De & Aaron Stanley, SEC Official Says “Plain English” Guidance on ICOs Is Com-
ing, COINDESK (Nov. 6, 2018, 1:05 PM), https://www.coindesk.com/sec-official-says-plain-english-
guidance-on-icos-is-coming [https://perma.cc/SM5E-WC6M].
63 Paul Vigna et al., What Crypto Downturn? ICO Fundraising Surges in 2018, WALL ST. J.
(July 1, 2018, 1:26 PM), https://www.wsj.com/articles/what-crypto-downturn-ico-fundraising-
surges-in-2018-1530466008 [https://perma.cc/NN27-NX9A].
64 SEC, DIVISION OF ENFORCEMENT ANNUAL REPORT 3 (2018), https://www.sec.gov/files/
enforcement-annual-report-2018.pdf [https://perma.cc/3KPY-VNAK].