Quick Take

Securities and Exchange Commission Chair Paul Atkins is spearheading an effort to create a "token taxonomy" that looks to delineate between what cryptocurrencies would be securities as the agency forges ahead with a new approach to regulating digital assets. 

In prepared remarks on Wednesday at the Federal Reserve Bank of Philadelphia's Fintech Conference, Atkins laid out his plans for that taxonomy, which he said will be rooted in the Howey Test.

The Howey Test is based on a 1946 U.S. Supreme Court case frequently cited by the SEC to determine if an asset qualifies as an investment contract and, therefore, a security. 

"In the coming months, I anticipate that the Commission will consider establishing a token taxonomy that is anchored in the longstanding Howey investment contract securities analysis, recognizing that there are limiting principles to our laws and regulations," Atkins said.

Cryptocurrencies can be a part of an investment contract, but it doesn't mean they will stay that way forever, Atkins later added. 

"Networks mature," Atkins said. "Code is shipped. Control disperses. The issuer’s role diminishes or disappears. At some point, purchasers are no longer relying on the issuer’s essential managerial efforts, and most tokens now trade without any reasonable expectation that a particular team is still at the helm."

'Not a promise of lax enforcement'

Under the Trump administration over the past year, the SEC has taken a starkly different approach to crypto than under the Biden administration. Under former SEC Chair Gary Gensler, the agency took a cautious approach to crypto and brought several cases against large crypto firms, saying that most cryptocurrencies were securities, while being criticized for his regulation-by-enforcement approach.

Since the SEC has dropped several investigations into crypto and has held crypto roundtables led by Commissioner Hester Peirce. With Atkins now at the helm, the agency has embarked on "Project Crypto" to update the SEC's rules around digital assets. 

Atkins also took a strong position on Wednesday on what parts of the digital asset industry would be in the SEC's purview. He reiterated the agency's stance that tokenized securities, such as stocks converted into tokens on a blockchain, would still be considered a security. 

In the past, Atkins has also spoken about "super-apps" that he said would allow for the trading and custody of several assets under one regulatory license. On Wednesday, Atkins said he directed staff to work on that. 

"I have asked Commission staff to prepare recommendations for the Commission to consider that would allow tokens tied to an investment contract to trade on non-SEC regulated platforms, whether registered at the CFTC [Commodity Futures Trading Commission] or through a state regulatory regime," Atkins said. 

Exemptions will also be on the agency's agenda. 

"I hope that the Commission will also consider a package of exemptions to create a tailored offering regime for crypto assets that are part of or subject to an investment contract," Atkins said.

Market structure bill

Meanwhile, lawmakers are forging ahead on legislation to regulate the crypto industry. There are multiple versions of a bill to regulate the sector at large. The House passed its version over the summer and the Senate now has two versions, the most recent one released from the Senate Agriculture Committee on Monday, which includes an array of unresolved issues.  

With the SEC moving ahead in the absence of a bill, Atkins said the agency's work aims to complement lawmakers' efforts. 

"What I envision aligns with legislation currently being considered by Congress and aims to complement, not replace, Congress’s critical work," Atkins said. "Commissioner Peirce and I have made it a priority to support Congressional efforts, and we will continue to do so."