In a landmark move, the Wyoming House of Representatives has become the first state legislature to pass legislation that establishes a new asset class for cryptocurrencies.
Wyoming House Bill 70, or the “Utility Token Bill”, sets forth important definitions and classifications of tokens, and allows for certain compliant token holders to be exempt from securities laws. This is the first Bill of its kind, and Wyoming appears to be one of the most blockchain friendly states right now. Will others follow suit?
What is a “Utility Token”?
Before diving into the contents of the Bill, and its importance, it is essential to revisit the concept of Utility Tokens.
The Securities and Exchange Commission (the “SEC”) investigation of the DAO token last summer established an important distinction in classifying digital currencies. The SEC ruled that Utility Tokens are not securities (of course, Utility Tokens are not well defined), and therefore do not need to register and comply with securities laws.
The SEC relies on the “Howey Test” to determine whether or not a token is a security. Under this rule, a security exists when:
- An investment is made;
- In a common enterprise;
- With investors reasonably expecting to earn profits through the enterprise.
This definition may seem vague, and this is precisely the issue that regulators and investors alike are struggling with. There have been countless Initial Coin Offerings (“ICOs”) and cryptocurrencies popping up, claiming to be Utility Tokens, when in fact they are truly securities.
The Munchee Token investigation helps shed light on those actions that are most egregious to the SEC (namely, calling yourself a Utility when it is clearly not). Essentially, the sentiment has been – call it for what it is. If a token looks like a security and acts like a security, the SEC will likely consider it to be a security.
Conversely, and as discussed further below, coins that in and of themselves have value, are considered to be Utility Tokens. I.e. if you sell a token that allows you to purchase some certain good or service with that token… it may be considered Utility Token.
Content of the Bill
It is important to understand the distinction between Utility Tokens and Securities, as this will frame the impact of this new legislation. As the first law specifically regulating cryptocurrencies, the definitions set forth may impact future measures and help clarify definitions of Utility Tokens.
Section 1 of the Bill states that all Utility Tokens will be exempt from Wyoming securities laws. The Bill outlines a framework for defining Utility Tokens (now herein referred to as “Open Blockchain Tokens”).
Open Blockchain Token Criteria:
- The owner of the token must file a notice of intent with the Secretary of State
- The token is for a consumptive purpose, i.e. exchangeable for goods, services, or content
- The owner does not represent that the token is a financial investment or market it as a security
- At least 1 must be true:
- The developer reasonably believed the token had a consumptive purpose
- The token itself has a consumptive purpose available at time of sale
- If no consumptive purpose at time or sale, the initial buyer is prevented from reselling token until a consumptive purpose is established
- The developer takes reasonable precautions to prevent purchasers from believing they are engaging in a financial investment
- At least 1 must be true:
The conditions appear in line with federal regulatory goals, drawing a clear line between securities and non-securities. The “consumptive purpose” element has potential to be adopted as the new standard for defining Utility Tokens, as it sets forth clear and concise factors that distinguish securities (i.e. do not advertise token as a security, actually have a service you are providing for that token). By laying out the expectations and regulations surrounding digital assets, the state has made it easier for developers, buyers, and brokers to remain transparent and compliant.
Moreover, the requirement to notify the Secretary of State may help to monitor and track those who are not attempting to be compliant, and engaging in deceitful practices.
The Bill is set for Senate vote in the coming weeks, and the Wyoming House of Representatives is simultaneously reviewing a handful of other crypto related bills that could open the doors even wider. It is exciting to see such strong initiative on the state level in the face of slower moving federal guidance.